How does mortgage affect credit score, and credit score affect mortgages?

How does mortgage affect credit score, and credit score affect mortgages?

In Australia, credit reporting agencies collect a variety of information about your borrowing history from banks and other financial institutions.

As part of Australia’s Comprehensive Credit Reporting, both your positive and negative repayment history information is reported and included in your credit report. Thanks to this more in-depth reporting, your credit score is impacted in more nuanced ways.

To keep track of how your mortgage affects your credit score, get a copy of your credit report from a credit reporting agency, perhaps even for free

Does applying for a mortgage affect your credit score?

Taking on debt always comes with some risk, and you need to make sure you can afford to repay the amount you owe, whether to a credit card company or a lender. Not repaying your debts or bills on time is reflected in your credit score and can make it difficult for you to borrow money later. Which is why even applying for a new source of debt, such as a mortgage, can affect your credit score. For most lenders, your credit score is a shortcut to understanding your level of responsibility when dealing with money, whether through a large mortgage or an average utility bill. 

When you submit a mortgage application, the lender will ask one of the three credit reporting agencies - Equifax, Experian, or Illion - for your credit report. This contains the details of all reported credit transactions involving you, including credit enquiries, debts, repayments, delayed payments, and payments defaults. The lender can then use all this information to estimate the risk of you failing to repay the loan, which helps them decide whether to approve your mortgage application. 

You may want to check your credit score before applying for a home loan. This will help give you an idea beforehand whether a lender will consider your application favourably. Remember that your credit score is unlikely to change if you check it, but mortgage inquiries can affect credit score.

Do I need a credit score to get a mortgage?

Having a credit score, especially a high score, can certainly improve the chances of getting your mortgage application approved. What’s more, if your credit score is in the excellent range, you may even qualify for discounts such as lower interest rates. Consider asking the lender how credit score affects the mortgage rate when you discuss the loan with them.

Each credit reporting agency follows a different credit scoring policy and has different score categories, which are still quite similar. The below range is the one adopted by Equifax and may help you understand the rating:

Tier 1: Your credit score is between 833 and 1,200 and rated excellent.

Tier 2: Your credit score is between 726 and 832 and rated very good.

Tier 3: Your credit score is between 622 - 725 and rated good.

Tier 4: Your credit score is between 510 and 621 and rated average.

Tier 5: Your credit score is between 300-509 and rated below average.

You should remember that your credit score is a moving indicator of your financial health, which means it can increase and decrease based on your transactions. Accessing your credit report is one way of learning about the positive or negative impact of each of your financial obligations. Credit reporting agencies are required to give you access to your report for free once every 12 months.

A low credit score simply means you may need to work on improving your score. Some ways you can do this are ensuring you don’t have too much outstanding debt and repaying your bills on time. You may find you don’t have a credit score if you haven’t ever taken on debt or if none of your transactions has been reported.

Does paying off my mortgage early affect my credit score?

Taking out a mortgage is going to be one of the largest financial commitments you make in your life, which means there is a lot of responsibility to it. You may feel that repaying your home loan as soon as possible is the best idea. But you need to consider if paying off your mortgage early affects your credit score and therefore your ability to get credit or loans in the future. 

The short answer is yes - if you repay your home loan early, your credit score will probably go up. But just because paying off your home loan early will increase your credit score doesn’t mean you should push yourself beyond your financial means to do so. One of the benefits of keeping your home loan, rather than paying it off early, is that maintaining your repayments indicates to other lenders that you're a responsible borrower. Having a good repayment history also improves your credit score.

How to get a mortgage with bad credit score

Most lenders may be wary of approving loans for borrowers with low credit scores. Some lenders may be open to having a discussion and trying to understand the reasons for the low score. If you have errors on your credit file like a wrongly included negative incident or the same incident included more than once, you can have them corrected by contacting the credit reporting agency.

Sometimes a lower score may be caused by a fairly old repayment issue that is still included in your file. This can occur because of the reporting agency’s policy on how long incidents stay on your file. You may want to discuss these issues with the lender to ensure they don’t affect your mortgage application. For instance, you can show that you’ve consistently tried to improve your score.

Even if your credit score is genuinely low, some lenders may offer you a mortgage. They may just not let you borrow as much, may ask you to pay a larger deposit, higher fees and possibly a higher interest rate. However, if you can pay off the loan in time, it can help to improve your credit score.

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What are some advantages of a good credit score?

You should know about the advantages of credit score improvement as there are many occasions when having a good score is helpful. If your credit score is categorised as good, very good, or excellent, it can indicate you have strong borrowing power. This may encourage lenders to give you special discounts on interest rates and other loan terms. You may also find it easier to get approved for a credit card or a property rental. You can also try to negotiate terms using your superior credit score as leverage.

A high credit score indicates that you are financially responsible, but it requires you to be disciplined. If you currently have a good credit score, you still need to remember not to apply too often for credit cards or loans as these can quickly pull down your score. On the one hand, you may have better access to credit, but your good financial habits mean that you may not need to access this credit. Having some credit products can help build up your credit report, and therefore your credit score. You would just need to keep the debt and limits to a minimum and pay the bills on time. It’s never advisable to take out credit that you can’t afford to pay as it negatively impacts your credit history.  Even if you have a good credit score, you can always improve it further.

Does a credit score check impact your credit score?

You may have heard that when a bank or lender performs a credit check, that it can impact credit score. But checking your own credit score isn't the same, and won't affect your credit score in the same way.

There are two types of credit checks that can be recorded in your credit history: hard credit checks and soft credit checks.

Hard credit checks occur when you apply to borrow money from a bank or lender, such as when you apply for a credit card or loan. A soft credit checks occur when your credit file is accessed outside of applications to borrow money, such as when you check your own credit score or credit history.

Checking your credit score is a request for information and not an application to borrow money, so it should not affect a lender’s decision to accept or decline your credit applications. As such, it's a soft credit check, and is unlikely to affect your credit score, positively or negatively.

 

Does borrowing money affect credit score?

Whether it’s through a home loan, a personal loan, or a credit card, borrowing money will affect your credit score. Taking on a home loan or a credit card may have a positive impact on your score, but too many loan applications can bring your credit score down.  

Every time you apply for credit, an inquiry is performed against your name. Too many inquiries can reflect negatively on your credit report, and if your loan application is rejected it will negatively impact your credit score.

How you handle your debt can also make a big difference. As long as you make timely payments you may be able to improve your credit score and overall creditworthiness. However, any missed or delayed payments will likely result in a negative impact on your credit score.

Why should I check my credit score annually?

You may not need to get your free credit rating every year, but it can help you stay informed. A yearly free credit report can help Australians keep track of the impact of various financial transactions on their credit score.

Your credit score helps inform financial organisations, particularly lenders, about the sort of payer you are. Depending on how you've paid down debt in the past, it will have affected your credit score in various ways. In Australia, the inclusion of Comprehensive Credit Reporting (CCR) means that you can find out which transactions affect your credit score positively, as well those that have a negative impact.

Because of this, you may want to consider getting a free credit report once a year irrespective of whether you’re planning to apply for a loan or take on other debt. Checking your credit report can tell you if there are errors in your credit file, which affect your credit score and need to be corrected.

What if your credit score has dropped for no reason

The importance of checking your credit score regularly is hard to overstate as the changes may not be as relevant to your life, and there may be the occasional error, but what should you do if it drops for no reason?

Credit reporting agencies calculate your credit score based on the information they receive from lenders, banks, credit card providers and utility companies, among others. This report takes into account both the credit enquiries these companies make, as well as your payment history with them, and may include other factors. But because some reports may come in at different times, delays can appear like drops. 

Suppose you missed paying a bill while on holidays and the supplier couldn’t reach you, or something like it -- in this instance, the provider may report the default to the credit reporting agency, which can cause your credit score to fall when the credit reporting agency eventually sees the information. Because of an obvious delay, the drop can seem random.

Regularly checking your credit score and the transactions that have appeared can provide some understanding as to why a credit score drop might have occurred, and even provide some understanding as to how you can fix the drop, improving your credit score in the process. 

Do landlords check credit scores?

For landlords, credit score checks can tell if a potential tenant has a history of delayed or missed rent payments. Usually, a poor record of repayments is likely to result in a low credit score. Also, your credit history may include information from tenancy databases such as the number of times landlords have inquired about your credit score. 

If there are too many inquiries within a short time, landlords may conclude that you have had issues renting in the past.  However, there is no rule as to when landlords check your credit score. Some might check every time they receive a tenant’s application. In some cases, landlords may even rent out their property to tenants with a poor credit history if they can submit additional documents or sufficiently explain their situation and how they are trying to address it.

 What credit score do landlords look for?

Landlords may look for issues relating to repayment rather than a specific credit score, although a low credit score probably suggests that you’ve had repayment issues. In general, if your credit score is categorised good, very good, or excellent - which corresponds to an Equifax credit score range of 622 - 1,200, landlords may not scrutinise your credit history too closely.

How regularly does your credit score change?

There are plenty of things that can affect your credit score, but when they'll impact it can vary wildly, and often depend on when the information has been passed on.

Every credit enquiry is noted on your credit file, and this impacts your credit score. Thanks to Comprehensive Credit Reporting (CCR), it means you both positive and negative transactions can impact your score, but so, too, can the frequency. For instance, if you apply too often for credit cards or apply with multiple lenders for a home loan and aren't successful, you may see a decline. 

How long this information take to pass on is an important question, but the length of time often depends on the credit reporting agency. Some transactions can take a small amount of time, while others take much longer. For that reason, it's important to check your credit history regularly so you can be more aware of what your credit score looks like, and if you need to correct any of the statements made on it. 

What is a good credit score?

Across Australia's major credit score providers, Experian and Equifax, there are five tiers, ranging from "below average" to "fair" to "good", "very good", and "excellent", with your score designating where you sit. As the tiers suggest, an Experian credit score between 625 and 699, and an Equifax credit score between 622 and 725, is technically considered to be in the range of "good". Anything above this is even better.

However, lenders will typically favour the borrowers with the highest credit scores which means that applicants with a "good" credit score may not be offered an interest rate as competitive as one offered to a borrower with a "very good" or “excellent” credit score.

What can impact my credit score?

Your credit score isn't set in stone and can change with every financial decision and action you take. While you checking your score is a soft check and won't impact the result, payments and other actions can affect the score. 

The very things that can impact your credit score include your payment history (late or on time), the age and type of credit you have and owe, your debt balance (both current and delinquent, if any), recent payment behaviour, the credit available to you presently, and if you have any court judgements or actions resulting form bankruptcy.

Australia's Comprehensive Credit Reporting (CCR) also tracks your positive payments, and allows your credit score to be impacted positively, as well. 

Can a bad credit score affect rental applications?

A landlord may check your credit score to work out how trustworthy you are, and whether you'll pay your rental obligations on time. So, can a bad credit score cause you to miss out on renting property?

When looking at your credit score for rental applications, landlords may not see a low score as a reason to instantly reject applications. Some may be more generous, and could be willing to consider a tenant with a lower credit score, or even request some form of additional deposit to act as security against possible future problems.

Alternatively, you may want to consider asking a guarantor to co-sign your lease, which gives the landlord peace of mind as they have an alternate payment source if you cannot make payment.

Where can I check my credit report for free?

While you can get a free credit report in multiple ways, RateCity's own credit checking system allows you to find your score from two credit history systems, Experian and Equifax. 

When you request your free credit report, you'll likely need to supply some personal information, such as your name, contact details, and a personal identification, such as a drivers license number or another form of identification. 

Not only does a credit report show credit score, but it usually often contains positive and negative credit transactions covering the past five years of payments. 

Can I check my credit score without a driver's license?

In Australia, your driver’s license is the preferred identification document for credit reporting agencies. This means you may not be able to confirm your identity using another document, such as a proof-of-age card. You may have genuine reasons like concerns over identity theft for not wanting to provide your driver’s license number. Unfortunately, most credit bureaus won’t allow people to check their credit score without a driver’s license. 

If you don’t have a driver’s license, there’s a good chance you haven’t applied for credit in the past and don’t have a credit score at all. In case you are concerned about identity theft, credit reporting agencies can offer you paid packages that include insurance against identity theft. Such packages may also include monthly credit score checks or alerts whenever your score is updated.

Can a debt collector affect your credit score?

When a creditor is unable to contact you by phone or by sending you a formal notice in regards to outstanding debt, they will often outsource the job to a debt collector. The debt collector can try to reach you by phone, or they can attempt to contact you face to face. If they cannot get through to you by either method, they can only report back to the creditor but not directly report a payment default to the credit rating agency. So, can debt collectors affect your credit score? No, they cannot do so directly.

However, if you owe money, you have an obligation to return it or communicate your difficulty in doing so to the creditor as well as to any involved debt collector. If they cannot contact you, they can report a serious credit infringement against you, which may affect your credit score for many years. Creditors can also take the legal route, and a court judgment against you can also severely impact your credit score.

You should remember that debt collectors need to abide by specific rules and cannot harass you by repeatedly calling or visiting you, or by threatening to confiscate your possessions if you don’t pay up. Similarly, they cannot threaten to file a default against you, especially with a credit bureau.

Does home loan pre-approval affect credit score?

Home loan pre-approval can give you a better idea of the amount you can spend when buying a property. It can also tell you about the steps you need to take to finalise your home loan and receiving the funds. Depending on how you approach a lender, pre-approval could include a credit inquiry which does affect your credit score. Some lenders, however, may offer an online pre-approval which is faster and doesn’t involve a credit history check. An online pre-approval may only consider your financial capacity and offer suggestions on how to prepare yourself to take a home loan.

Most lenders, however, will likely prefer to make a full assessment of your financial situation by requesting a credit report in addition to your bank statements and tax returns. Such a credit inquiry, sometimes called a hard pull, is usually recorded on your credit file and can therefore affect your credit score. If you approach several lenders and all of them initiate credit inquiries, this will impact your credit score negatively. Sometimes credit reporting agencies make an exception in terms of including multiple credit inquiries if they are made within a certain period. It would still be best to avoid making multiple applications with different lenders.