Credit scores are a critical factor in obtaining financing for property investment, and it’s essential to understand how they work and how to improve them. In this article, we will explore the truth about credit scores and provide insights into how investors can improve their credit scores to increase their chances of obtaining financing.
The Truth About Credit Scores
1. What is a Credit Score?
A credit score is a numerical rating that reflects an individual’s creditworthiness. Credit scores are calculated based on a range of factors, including credit history, payment history, credit utilisation and length of credit history. The most common credit score used in Australia is the Equifax credit score which is a credit rating that ranges between 0 to 1200. This is the ‘band’ your credit score sits in (for example, low, fair, good, very good, excellent).
2. How are Credit Scores Used?
Credit scores are used by lenders to assess an individual’s creditworthiness and determine the likelihood of them repaying a loan. Higher credit scores indicate a lower risk of default, which can result in more favourable lending terms, such as lower interest rates and higher borrowing capacity. Conversely, lower credit scores can result in higher interest rates and more limited borrowing capacity.
3. What Factors Impact Credit Scores?
Several factors can impact credit scores, including:
- Payment history: Late or missed payments can have a significant impact on credit scores.
- Length of credit history: A longer credit history can be beneficial for credit scores.
- Low credit balances: by owing less on your credit cards and loans, this can improve your credit score. Conversely having high balances can reduce your credit score.
- Credit inquiries: Too many credit inquiries can have a negative impact on credit scores.
- Defaults, Court judgements, debt agreements, and bankruptcy will hinder your chances of obtaining credit from a bank or low interest rate financial institution.
How to Improve Your Credit Score
1. Check Your Credit Report
The first step to improving your credit score is to check your credit report regularly. Errors or inaccuracies on your credit report can negatively impact your credit score and when you’re ready to buy your first, or next property, it’s vital you have the right information in place. By checking your credit report regularly, you can identify and correct any errors before they have a significant impact on your credit score.
2. Pay Your Bills on Time
Payment history is one of the most significant factors that impact credit scores. To improve your credit score, it’s essential to pay your bills on time, including credit card payments, loan payments, and utility bills. Late or missed payments can have a significant negative impact on your credit score, so it’s crucial to make payments on time.
3. Build a Longer Credit History
The length of your credit history can also impact your credit score. To improve your credit score, it’s essential to build a longer credit history by keeping credit accounts open and active over time. This demonstrates a history of responsible credit use and can positively impact your credit score.
4. Limit Credit Inquiries
Too many credit inquiries can have a negative impact on your credit score. To improve your credit score, it’s essential to limit credit inquiries by only applying for credit when necessary and spacing out credit applications over time.
5. Low Credit balances
If you have a history of low credit balances this can improve your credit score. The lower the better.
In summary, credit scores are a critical factor in obtaining financing for property investment, and it’s essential to understand how they work and how to improve them. By checking your credit report regularly, paying bills on time, reducing credit utilisation, building a longer credit history, and limiting credit inquiries, investors can improve their credit scores and increase their chances of obtaining financing with favourable lending terms.
As a mortgage broker, I see many issues with clients when they apply for credit for a home loan and on most occasions it’s because of something simple that has been flagged on their credit score.
If you’re ready to start investing or buying property, but worried about how your credit score will affect you, I am here to offer guidance and support in navigating the landscape. Please don’t hesitate to book a free call with me here if you require further assistance. Wishing you the best of luck in your efforts to improve your credit score!