Your credit score is a number that reflects your creditworthiness to a lender. When you apply for a home loan, lenders will typically check this number to determine how much of a risk you pose as a borrower. If your credit score is high, lenders are more likely to approve your application and may also offer you a lower interest rate compared to other borrowers. On the other hand, a low credit score indicates a higher degree of financial risk, leading to higher interest rates or even your mortgage application getting declined in some cases.
In simple terms, maintaining a good credit score increases your chances of qualifying for a home loan. By understanding what information is used to calculate your credit score, you can work towards improving any areas that might be bringing down your score and adopt positive financial behaviours that will help your credit score.
In Australia, after the introduction of Comprehensive Credit Reporting, both positive and negative information in your credit file is used for calculating your credit score. Positive information includes paying your bills on time and paying off debts. Negative information includes making late bill payments, applying for multiple credit products in a short span or defaulting on your loans. However, not all your actions related to money have an impact on your credit score. In this post, we bust some common misconceptions and share four things that don’t impact your credit score.
1. How much you earn
The amount of money you earn has nothing to do with your credit score because how much you make says nothing about how you manage your money. If you earn well but have a lot of debt, or you’re careless enough to miss paying your bills on time, your credit score is likely to be low irrespective of how much you earn. Similarly, your credit score is expected to be high even if your salary is less than average, but you pay all your bills on time and don’t have any credit defaults.
Even though your income doesn’t impact your credit score, it may affect your access to credit products, like a home loan. Lenders want to know how much you earn to calculate your serviceability for a loan. Even the law requires lenders to use all reasonable measures to determine whether you can comfortably repay a loan before advancing money to you. How much you earn can thus impact your borrowing capacity, apart from other things, such as your expenses, savings, investments, and existing debts.
2. A rejected credit card application
Getting rejected for a credit card may be disappointing, but it doesn’t hurt your credit score. However, the credit card provider may carry out a credit check (also called a hard enquiry) on you when you apply for a new card, which may reduce your credit score by a few points.
Even though credit card rejections don’t impact your credit score, it’s advisable not to make multiple applications for credit at the same time. If your credit card application was denied, investigate the reason for the rejection and work on improving those areas before applying again. Making multiple credit applications can result in a series of credit enquiries being reported on your file, which may hurt your credit score. Several credit enquiries too close to each other could give the impression that you’re hungry for credit or having financial trouble, which could be a red flag for lenders and credit card providers.
3. Checking your own credit score
Your credit score is affected when banks or other credit providers conduct a credit check on you. However, checking your own credit score doesn’t hurt it in any way. When you check your credit score with any of the credit reporting agencies or other online services, they generally carry out what is called a soft credit check. Since it is not a formal application for credit, such enquiries are not recorded on your credit report and are not used for calculating your credit score.
It’s generally worth checking your credit score regularly, especially before you apply for new credit, such as a home loan. A low credit score could lead your application to be rejected by some lenders, and checking your score regularly can help you avoid this situation.
You should also check your credit file to find out whether the low score results from any inaccurate information recorded on your file. While this isn’t common, sometimes errors can creep into your credit report, but you can always inform the concerned lender or credit bureau to have such information corrected.
4. Comparing home loan rates
When you’re applying for a large loan, such as a home loan mortgage, it makes sense to shop around for the best interest rates from multiple lenders. The simplest way to compare home loan interest rates is by visiting a comparison site to compare the interest rates, fees and features offered by various lenders. While shopping around online like this is unlikely to affect your credit score, applying to a lender for pre-approval or a personalised rate could potentially impact your credit score.
You need to remember that whenever you apply for a credit product, a lender carries out a hard check on your credit score, bringing down your credit score by a few points. While a couple of such applications may not make much of a difference, if you make too many credit applications, the impact can snowball and lower your credit score significantly.
If you’re not sure about the right type of home loan for you or are confused about your eligibility for a home loan, it may be better to connect with a mortgage broker than to apply to multiple lenders for home loan approval. A mortgage broker can suggest the best-fit loans for your situation and also try to negotiate a lower rate to get you a better deal on your home loan. Owing to their experience, a mortgage broker can also suggest lenders that are more likely to approve your application to avoid the need to make multiple credit applications.
