How credit scores affect your home loan application

What is a credit history/score?

A credit score is a number that represents your risk of future defaults based on your credit history - it’s used by lenders to assess your application for credit. 

Your credit history is a record of your personal debt repayments and defaults, including loan enquiries, credit products, dates, credit limit, lender names, and number of defaults/judgements. 

A high credit score indicates a good repayment history and manageable debt, while a low credit score suggests missed repayments or too much debt.

What is a credit history?

A credit history is a documented record of an individual's debt repayment and defaults. It is used by credit reporting agencies to calculate an individual's credit score. A credit history includes the following details;

• Loan enquiries made within the last five years.

• The type of credit products applied for, such as credit cards, loans, post-paid mobile plans, etc.

• The dates on which the inquiries were made.

• The credit limit for which an individual applied.

• The names of lenders with whom an individual has applied.

• The number of defaults/judgments on an individual's credit history.

How to check your credit score?

Checking your credit score is a straightforward process and one that is important to complete. You can obtain a free copy of your credit report once a year from each of the major credit reporting agencies, such as Equifax, Experian, or illion.  All you need to do is visit their website, provide some details and follow the prompts to receive your credit report. Checking your report helps you know your financial standing, making it crucial when applying for loans. Additionally, there are also several online services and apps that allow you to check your credit score for free. It's essential to review your credit report regularly to ensure all the information is accurate, as it can affect your ability to get loans in the future.

How is your credit score calculated?

Qantas Money Home Loans uses two credit reporters (Equifax and Illion) to obtain credit histories. An Equifax credit score is between 0-1200 and an Illion credit score is between 0-1000. In both cases the higher the number, the better your score.

1. Payment history

The most significant factor in determining your credit score is your ability to repay the funds that you have borrowed. This includes factors such as timely bill payments, late payments, debt collections, bankruptcies, foreclosures, and the length of time between each negative event. All of these factors are taken into account when evaluating your repayment history.

2. Debt amount

Simply making repayments is not enough to achieve a good credit score. The amount of debt you currently have also plays a significant role in determining your score. Credit reporting agencies take into account the following factors;

• The amount of available credit you have used.

• The amount you owe on specific types of credit, such as mortgage, credit cards, car loans, etc.

• The total amount you owe.

Generally, the lower the amount of debt you have, the better it is for your credit score.

3. Timeline of your credit history

Having a long credit history, free of late payments, can positively impact your credit score. It demonstrates that you have a history of managing your credit accounts responsibly and making timely repayments. However, a short credit history does not necessarily mean a poor credit score. As long as you have made your payments on time and do not owe too much, your credit score should be fine.

Additionally, the frequency with which you apply for new credit is considered when calculating your credit score. Acquiring a significant amount of new debt in a short period may indicate financial difficulties, which could make lenders hesitant to lend to you.

4. Types of credit

When it comes to credit, there are two basic types, revolving accounts and instalment loans.

Revolving account

Revolving accounts allow you to borrow funds repeatedly up to a maximum limit without a specified end date, as long as you continue to make your minimum repayments. With revolving accounts, you typically have the option to repay any amount between the minimum repayment and the full balance of the account. If you do not pay the full balance by the end of the billing period, the remaining balance is carried over to the next period, and interest is charged on this amount. Examples of revolving accounts include line of credit home and investment loans, credit cards, utilities, and mobile phone plans.

Instalment loan

Instalment loans are a predetermined amount of credit that is repaid over time with a set number of scheduled repayments. The loan has a specific term length, which can range from a few months to 30 years. During this period, you make fixed repayments at scheduled frequencies until the loan is fully repaid. Examples of instalment loans include term home and investment loans, car loans, and personal loans.

5. Number of enquiries

When you apply for a loan, the lender will make an inquiry on your credit report, which is known as a 'hard' inquiry. While one or two of these inquiries may not significantly impact your credit score, it is advisable to keep them to a minimum. Applying with multiple lenders can negatively affect your credit score.

It is important to note that only the last 12 months of inquiries are considered when calculating your credit score. After 24 months, they are removed entirely from your credit report.

What is a good credit score for a home loan?

Qantas Money Home Loans use Equifax to obtain credit scores. Equifax provides a credit score between 0-1200. Other providers might use other scoring systems that provide different ranges to determine the strength of your score.

• Below average to average (0-509): You are more likely to have an adverse event recorded on your credit report in the next year.

• Average (510-621): You are somewhat likely to have an adverse event recorded on your credit report in the next year.

• Good (622-725): Adverse events will be less likely for you in the next year.

• Very good (726-832): You are unlikely to have an adverse event recorded on your credit report in the next year.

• Excellent (833-1200): An adverse event is highly unlikely to happen to you within the next year.

How does my credit score affect my home loan application?

If you have a high credit score, you will likely have more home loan options available to you (including lower interest rates). An average credit rating will see you with less options and possibly higher interest rates (aka risk-based pricing). And a low credit rating may mean that you aren’t able to get approved for a home loan at all.

What can I do to improve my credit score before applying for a home loan?

1. Look at your credit report for incorrect information 

It’s a good idea to order a copy of your credit report to check for incorrect information. You should look out for incorrect personal information, repeated or inaccurate debt amounts, incorrect credit defaults, current outstanding debts and any debts that were created in error. If your history has any incorrect information you can contact the lender directly to have them remove it.

Enquiring about your own credit history is considered a soft enquiry so you don’t have to worry about it negatively affecting your score. You can request a free copy of your credit history through Equifax.

2. Maintain an active credit account

If you haven’t had any credit accounts, you may have a ‘lighter’ or ‘thin’ credit history. However, lenders may still be able to gauge your creditworthiness based on telco and utility accounts under your name.

3. Lower your credit card limits to the minimum

Credit reporters don’t just look at the amount of debt you currently have to pay back, they also look at the amount of credit that is available to you. The limit of your credit card is a factor that may impact your credit score. For example, a smaller credit card limit may carry a different level of risk to a larger limit. 

4. Consolidate your debt

If you have multiple loans, consolidating them into one loan can help improve your credit score. That’s because by consolidating loans, you turn several repayments into one manageable repayment and save money if you’re able to refinance at a lower interest rate. Likewise, combining multiple credit cards into one card can also help your credit score. Having just one credit card lowers the amount of credit you have available to you and is a single credit account on your record as opposed to multiple.

5. Make your repayments on time

Making your repayments on time is the best way to ensure that you don’t have any defaults on your record. A default is when you’ve had an overdue payment valued over $150 for 60 days or more, they stay on your credit report for 5 years.

6. Avoid too many hard credit enquiries

When applying for any kind of credit, the lender will request to review your credit report, and this is recorded in your history. Too many hard enquiries can negatively affect your credit score, so if your application is rejected, wait a bit before you apply again.

7. Avoid applying for credit before you apply for a home loan

If you apply for credit right before you apply for a home loan you are adding to the number of hard enquiries on your credit history. You are also increasing the amount of debt that you have which could negatively impact your score.

Thinking of applying for a home loan?

Before applying for a home loan, consider requesting a copy of your credit report and checking for incorrect information. Having a strong credit score can allow you to apply for a home loan with confidence.  

^* You have to be a Qantas Frequent Flyer member to apply for the Qantas Home Loan. This information has been prepared without considering your objectives, financial situation or needs. You should consider your circumstances before acting on this information.