How to Improve Credit Score Before a Home Loan Application

A past credit repayment issue, several recent credit applications or an error on a credit report may create questions when you are preparing to buy property. Understanding your credit profile before applying for a home loan may give you time to identify errors, review existing credit commitments and address issues that may be relevant to a lender's assessment. It is not about trying to create a perfect financial history overnight. It is about understanding the information recorded on your credit file and maintaining your financial commitments over time.

For Australian home buyers, a credit score is only one part of the lending picture. Credit history and the information contained in your credit report may form part of a lender's assessment alongside factors such as income, living expenses, savings, existing liabilities and the proposed loan.

What your credit score tells a lender

Your credit score is a number calculated from information in your credit report. In Australia, credit reporting bodies such as Equifax, Experian and illion may use different scoring systems, so your score can vary between providers. The information contained in your credit report, as well as the lender's own credit assessment and policy, may be relevant to a home loan application.

Your credit report can include your identity details, current and past credit accounts, credit limit information, repayment history, credit enquiries, defaults and public record information such as certain court judgments. Under comprehensive credit reporting, participating credit providers can also report whether repayments were made on time or late.

Lenders may consider credit-report information differently depending on their credit policy and the broader circumstances of an application. A credit score or repayment-history issue is generally considered alongside other information relevant to the credit assessment. The significance of particular credit-report information will depend on the lender's credit policy and the broader circumstances of the application.

Steps that may support your credit profile

Changes to a credit profile may take time, and there is no single action that guarantees an improved credit score. The following steps may help you review your credit information and prepare for a broader home loan assessment.

Check your credit reports before you apply

Start by obtaining a copy of your credit report from the main credit reporting bodies. You have the right to obtain a free copy of your credit report every three months. Check that your name, address history, credit accounts and repayment information are correct. Look closely for accounts you do not recognise, debts that have already been paid, or an incorrectly recorded late payment or default.

If you find an error, raise it with the credit provider that supplied the information and the relevant credit reporting body. Keep copies of account statements, payment confirmations and your correspondence. Corrections can take time, so this task is best completed well before you plan to make an offer or submit a loan application.

Requesting your own credit report does not count as a credit application. It is a sensible part of getting financially ready for a home loan.

Pay every commitment by the due date

Repayment history information may form part of your credit report and may be considered as part of a credit assessment. Make all required payments on credit cards, personal loans, car finance, utility accounts and mobile plans by their due dates. If direct debits suit your budget, they may help reduce the likelihood of an accidental late payment.

Repayment history information generally remains on a credit report for two years, so maintaining required repayments over time may contribute to the information available to lenders when assessing an application. A consistent recent pattern of on-time repayments can be more helpful than trying to explain avoidable late payments at the last minute.

If you are having difficulty meeting a repayment, consider contacting the credit provider early to discuss available options, including whether financial hardship assistance may be appropriate. Financial hardship arrangements have specific credit-reporting rules, and the existence of financial hardship information cannot be used by a credit reporting body to calculate your credit score.

Reduce credit card limits and unnecessary debt

Lenders assess more than the balance showing on your credit card statement. Credit-card limits and other existing credit commitments may be considered when a lender assesses liabilities and borrowing capacity. The treatment of these commitments varies between lenders. For example, a credit card with a $15,000 limit may be treated as an existing credit commitment as part of a lender's serviceability assessment, even where the outstanding balance is relatively low. The treatment will depend on the lender's policy.

Consider whether each card, store finance account or buy now, pay later facility still serves a purpose. You may wish to review whether existing credit limits and facilities remain appropriate for your circumstances. Reducing or closing facilities may affect your liabilities and borrowing assessment, although the treatment will depend on lender policy and your circumstances. However, do this thoughtfully. Consider any changes in the context of your broader financial circumstances and borrowing requirements rather than making changes solely for the purpose of a home loan application.

Reducing outstanding personal-loan or credit-card debt may affect your ongoing financial commitments and borrowing position. The effect will depend on the lender's assessment methodology and your broader financial circumstances. For prospective buyers, freeing up cash flow can also make it easier to build savings for costs such as stamp duty, conveyancing, inspections and moving.

Avoid multiple credit applications in a short period

A formal application for a credit card, personal loan, car loan or other credit product may result in a credit enquiry being recorded on your credit report. Credit enquiries form part of the information that may appear on a credit report, and lenders may consider the number, type and timing of enquiries as part of their assessment. Credit enquiries generally remain on a credit report for five years.

This does not mean you should never compare finance. It means you should research first and apply selectively. For a home loan, it is often better to understand your likely borrowing position and suitable lender options before submitting applications. A mortgage broker may help you understand relevant lender policies and consider available lending options before a formal application is submitted.

Before applying for retail finance, interest-free offers or additional credit in the period leading up to a property purchase, consider that a credit enquiry or new liability may form part of a subsequent home loan assessment.

Keep your financial details consistent

Accurate and consistent personal and financial information may assist when documents are reviewed as part of an application. Use your correct legal name and current address when opening accounts, and update providers after you move. If you have changed your name, keep the supporting documents available.

Depending on the lender and application, transaction statements or other financial information may be reviewed as part of the assessment. Existing liabilities, overdraft facilities, regular commitments and declared living expenses may also be relevant to the lender's assessment.

This is not about avoiding normal spending. Lenders understand that households have real costs and changing priorities.

Changes to your credit profile may take time

A credit score may not change immediately after you pay off a debt or correct an error. Credit providers report information at different times, and updates to credit-report information occur according to applicable reporting processes and timeframes, so changes may not appear immediately.

Different types of credit information remain on a credit report for different periods. For example, repayment history generally remains for two years, credit enquiries and defaults generally remain for five years, and financial hardship information generally remains for one year.

Different categories of credit-report information are retained for specified periods. The period it stays on a credit report depends on the type of information and the circumstances. Rather than assuming a past issue rules out home ownership, seek clarity about what is recorded, whether it is accurate and how different lenders may view it.

This is why a credit score should not be considered in isolation. Existing liabilities, credit limits, recent enquiries, repayment history, income, expenses and other aspects of the application may also be relevant to a lender's assessment.

Your credit score is only part of home loan readiness

A credit score and credit report form only part of the information that may be considered in a home loan assessment. Before you apply, review your deposits, recurring expenses, employment position and current liabilities alongside your credit file.

Where two applicants apply jointly, information relevant to each applicant's financial position and credit assessment may be considered by the lender. These circumstances may affect borrowing capacity, lender eligibility and the loan options available, subject to lender assessment.

Your credit score is one part of your broader credit profile and should not be considered in isolation. Reviewing your credit report, checking that the information recorded is accurate, understanding existing credit commitments and maintaining repayments may help you prepare for a future home loan application.

If you are considering purchasing, refinancing or investing, a mortgage broker may help you understand how your credit profile and existing commitments may be considered under different lender policies.

At Inspiration Lending, we help clients understand relevant lender requirements and available home loan options based on their individual circumstances, borrowing requirements and property plans.

Disclaimer

General information only and does not constitute credit advice. Your full financial situation and requirements need to be considered prior to any offer and acceptance of a loan product. Lending is subject to lender approval.

Inspiration Lending Pty Ltd Credit Representative 569537 is authorised under Australian Credit Licence Number: 389328 | ABN 20687381737.