Home Loans, Tips

Home loans and bad credit ratings

Can a bad credit rating stop you from getting a home loan?

As experienced Melton Mortgage Brokers, we can tell you that the simple answer to this question is ‘yes’. Bad credit ratings do affect your ability to access home loan finance. The main concern of any lender when assessing your home loan application is that you’ll be able to make your repayments.

If you have a bad credit rating, it signals to a lender that you’re a higher risk of either not making your repayments on time, or of not making them at all.  Lenders in Australia are legally required to lend responsibly.

What factors affect your credit rating?

Your credit rating (also known as a credit score) is determined by a number of factors, including:

  • your credit history (whether you’ve made your scheduled repayments on time for any previous credit you’ve received). Lenders record this information with credit reporting agencies, and it stays on your credit file for five years.
  • the number of credit applications you’ve made over the past five years. If you’ve had a number of unsuccessful applications, it means that lenders generally perceive you as too great a credit risk.
  • whether you’re on the electoral roll and how often you change your address. Lenders prefer stability and transparency with your contact details.

Authorised credit providers can access your credit score via credit reporting agencies.

It’s important to understand that your credit rating is influenced by your repayment history for all types of credit, not just loans. For example, utility bills like phone, internet, electricity and gas services are forms of credit. If you don’t pay those bills on time (or at all), it affects your credit rating. It’s exactly the same with credit cards and other credit providers such as Afterpay.

It’s important to have a good credit rating when you apply for any type of credit. Your credit rating gives a credit provider an idea of the potential risk of lending you money.

If you have a bad credit rating, it’s more likely that any credit application that you make will be declined, or at the very least that the lender will  include additional conditions on your contract. For example, they could charge you a higher interest rate on your loan or require you to provide a guarantor who agrees to become legally responsible for your debt if you fail to make your repayments.  

A bad credit rating could also reduce your borrowing capacity even if a lender is prepared to approve a loan for you.

How you can find out your credit rating

You have a legal right to access your credit rating through credit reporting agencies such as Equifax  and Illion. You also have the right to have any incorrect credit history information promptly corrected, as it affects your chances of any credit approval.

Credit ratings generally range from scores of -200 to 1200. The higher the score the better. Any credit score less than 500 is generally a cause for serious lender concern.

How to improve your credit rating

The simplest way to earn a good credit rating is by making all of your scheduled credit repayments on time. If you’ve always done that, keep doing it. If you haven’t, ensure that you do it from now on. The two major things you want to avoid are late or missed credit repayments. Both negatively affect your credit rating. 

You can take simple steps to avoid missing any credit repayments. For example, by keeping your creditors informed of any changes to your:

  • contact details (i.e. your physical or email addresses and phone numbers), so you don’t miss any important payment due notices from your credit provider.
  • bank account details, so any direct debit repayments of your credit aren’t missed.

You can also set up direct debit repayments from your bank account to ensure that you don’t miss any.

However, if you do find yourself struggling to make any of your credit repayments, talk to your credit provider to see if they will agree to an alternative repayment plan before you start missing any payments. It’s in their best interest as well as yours for you to repay the credit they’ve provided to you. If you do agree on an alternative repayment arrangement with your credit provider, make sure it is in writing and that you stick to it.

If you have multiple debts, consider consolidating them into a single credit arrangement with the lowest possible interest rate before you start falling behind with any of your repayments. This will not only save you interest, it will also make it easier to manage your total debt via single regular repayments each month, rather than having multiple repayments per month.

Finally, if you’ve actually missed repayments on any credit provided to you, rectify the situation as soon as possible.  Don’t bother applying for additional credit if you have overdue debts.

How our Melton Mortgage Brokers Can Help You

At PAT Finance & Mortgage Broking, we can help you to find the right home loan. We’re based in Melton in Melbourne and service nearby areas including Bacchus Marsh, Caroline Springs, Plumpton, Rockbank, Gisborne and Sunbury. We’ll take the time to understand your individual home loan needs and goals. We work for our clients, not for lenders. We’ll provide you with the best possible mortgage broking advice in Melton.

Finance your dreams, secure your future. Contact us today to book your free home loan assessment to find out how we can help you.

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