A common reason why applications submitted to lenders get declined is because of an applicant’s credit score. A credit score is typically a number between 0-1,200 and is made up of several criteria – credit conduct history, the amount of credit enquiries, the type of enquiries made and the length of time the applicant has had access to credit. The higher the score, the more credit-worthy you will appear to lenders. So how does this affect your ability to borrow money? To understand this we will look at each criteria in detail.
CREDIT CONDUCT HISTORY
The most important element to a good credit score is the repayment history on any existing loans or credit cards. This gives the lender a very good idea whether the applicant has been able to manage their finances effectively. Since the introduction of comprehensive credit reporting last year lenders are armed with more information on an applicant’s repayment history than ever before. If there is any history of late or missed payments this will now be captured and will negatively affect the credit score. Late or missed payments take around 30 days to be reported to the credit agency who manages this information, but this stays on your record for seven years, so poor repayment history may affect your ability to access finance for a long time.
THE NUMBER OF CREDIT ENQUIRIES
How often you apply for credit will also have an effect on your credit score. Lenders lodge an enquiry on your credit report whenever you apply for certain types of credit, such as a Home Loan, Personal Loan and credit card. The numbers of enquiries, particularly where you lodge several applications with different lenders for the same transaction, may indicate that you are desperate for funds or have been declined by other lenders. Large numbers of enquiries will have a negative impact on your score.
THE LEVEL OF DEBT
The amount of debt you have available, when compared to your income level, is considered when determining your credit score. Lenders use a calculation, known as DTI (Debt to Income Ratio) to work out whether an applicant can afford to repay a new loan. This also takes into account existing credit limits that an applicant may have but also may not be fully utilizing.
For example, having a credit card with a $20k limit means the lender has to consider the effect on an applicant being able to afford the repayments on a new loan, even though the applicant may not owe anything on the credit card. Because the applicant is not fully utilizing the card the credit score will not necessarily be affected adversely, but if the applicant was regularly maximizing the credit limit and slowly paying the debt down the lender would see this as a red flag when it comes to affording any new debt repayments.
Lowering your debt levels by paying loans off or reducing available credit limits will improve your credit score.
THE TYPE OF CREDIT ENQUIRIES
The use of buy now, pay later services like Afterpay and Zippay has been increasing significantly since they entered the Australian market. What a lot of people do not quite understand is that these facilities are a type of credit, and some of these providers will conduct an enquiry on your credit report to determine whether to provide you with a purchasing limit. Having a number of these enquiries on your report may have an effect on your credit score, particularly if there are any missed or late payments that are reported.
Having multiple buy now, pay later facilities can also be a red flag to a lender, especially if they are being utilised regularly and significant payments are being made to cover the debt.
Similarly, accessing any interest-free deals with retailers such as Harvey Norman will generate another credit facility which can negatively impact your credit score if not managed correctly.
THE AGE OF CREDIT HISTORY
The length of time an applicant has had access to credit may also have an impact on the credit score. If an applicant has had a credit facility for a number of years and has maintained a regular repayment schedule, with consistent on-time payments, this will provide the lender with surety that the applicant can manage their finances well and make payments. This will impact positively on the credit score.
HOW DO I IMPROVE MY CREDIT SCORE
There are a few ways in which you can help to improve your credit score, therefore increasing your chances of having an application for finance approved. These include:
- Make sure your repayment history is clear of late or missed payments.
- Avoid submitting multiple applications for finance.
- Do not max-out credit card limits.
- Understand your budget and regularly review your credit facilities.
- Cancel any unused credit you may have. Get rid of any old, repaid credit cards that you may have accumulated over time.
- Regularly check your credit report to ensure there are no enquiries made that you are unaware of. There are many service providers offering the ability to access free credit checks so a simple Google search will help you find out how to access your score.
At SHL Finance we are always looking to help our clients improve their financial well-being. If you would like to find out whether you could be eligible for a new Home Loan, Investment or Personal Loan, please contact Reece Droscher on 0478 021 757.