Demystifying Your Credit Score: How It Impacts Your Loan Application and How to Improve It

Demystifying Your Credit Score: How It Impacts Your Loan Application and How to Improve It.

Understand your Australian credit score, its impact on home, investment, and business loans, and discover practical ways to improve it for better financial opportunities.

Navigating the Australian Credit Landscape: Your Guide to Credit Scores

In Australia’s dynamic financial landscape, your credit score is more than just a number; it’s a vital indicator of your financial health and a key determinant in securing significant financial opportunities. Whether you’re dreaming of your first home, expanding your property portfolio, or seeking capital to grow your business, understanding and managing your credit score is paramount.

At SBS Lending, we believe in empowering our clients with clear, trusted, and financially savvy advice. This comprehensive guide will demystify your credit score, explain its profound impact on various loan applications, and provide actionable strategies to help you improve it.

What Exactly is a Credit Score, and Why Does it Matter?

Simply put, a credit score is a numerical representation of your creditworthiness. It’s a snapshot, generated from your credit report, that helps lenders assess how responsibly you’ve managed credit in the past. In Australia, credit scores typically range from 0 to 1,000 or 0 to 1,200, depending on the credit reporting body (CRB) that calculates it. A higher score generally signals to lenders that you are a lower-risk borrower.

This single number plays a crucial role in a lender’s decision-making process, influencing whether you’ll be approved for a loan, the interest rate you’ll be offered, and even the loan terms.

How is Your Credit Score Calculated in Australia?

Your credit score is derived from the information contained within your credit report, which is a detailed history of your borrowing and repayment behaviour. In Australia, there are three main credit reporting bodies (CRBs) that compile these reports and calculate scores:

Equifax (formerly Veda)
Experian
illion (formerly Dun & Bradstreet)

Each CRB uses its own proprietary algorithm, meaning your score might vary slightly between them. However, the fundamental factors considered are similar across the board:

Repayment History (approx. 30-35%): This is arguably the most significant factor. It records whether you’ve made payments on time for credit cards, personal loans, mortgages, and even utility bills and phone contracts. Late or missed payments, defaults, bankruptcies, or court judgments can severely impact your score.
Credit Utilisation (approx. 30%): This refers to how much credit you’re using compared to your total available credit limit. Keeping your credit card balances low relative to their limits demonstrates responsible management.
Length of Credit History (approx. 15%): A longer history of responsibly managed credit accounts generally works in your favour, as it provides more data for lenders to assess your behaviour over time.
New Credit & Enquiries (approx. 10%): Each time you apply for credit (a “hard inquiry”), it’s recorded on your report. Multiple applications in a short period can suggest financial distress and negatively impact your score.
Credit Mix (approx. 10%): Having a healthy mix of different credit types (e.g., a home loan, a credit card, a car loan) and managing them well can positively reflect on your score.

Understanding Australian Credit Score Ranges:

While ranges vary, here’s a general idea of how scores are categorised:

Excellent: Typically 800+ (Experian, illion) or 853-1200 (Equifax). Signifies a very low-risk borrower, likely to receive the best offers.
Very Good/Great: Typically 700-799 (Experian, illion) or 735-852 (Equifax). Considered low risk with a high chance of approval.
Good: Typically 625-699 (Experian) or 500-699 (illion) or 661-734 (Equifax). You’re deemed a reliable borrower, but may not get the absolute best rates.
Fair/Average: Typically 550-624 (Experian) or 300-499 (illion) or 460-660 (Equifax). Lenders may see you as a moderate risk, potentially leading to higher interest rates or stricter terms.
Below Average/Low/Poor: Typically 0-549 (Experian) or 0-299 (illion) or 0-459 (Equifax). You are seen as high risk, with significantly lower chances of approval and less favourable conditions.

The average Australian Equifax credit score was 846 out of a possible 1,200 in 2022, placing it in the ‘very good’ range.

The Impact of Your Credit Score on Loan Applications

Your credit score is a gatekeeper to various financial products, directly influencing a lender’s confidence in your ability to repay.

Mortgages and Home Loans

For first home buyers and property investors, your credit score is a critical factor in securing a mortgage. Lenders use it to assess the risk of lending you a substantial amount of money.

Approval Chances: A high credit score (generally considered 700+ or 800+ for “excellent”) significantly increases your likelihood of loan approval. Conversely, a low score (below 550, for example) can lead to rejection or necessitate a larger deposit. Most lenders prefer a minimum score of at least 620 to 650.
Interest Rates: Borrowers with excellent credit scores are often rewarded with lower interest rates, which can save you tens of thousands of dollars over the life of a 30-year mortgage. A lower score can result in higher interest rates, increasing your monthly repayments and overall loan cost.
Loan Terms and Borrowing Power: A strong score can open doors to more flexible loan terms and potentially a higher borrowing capacity. A weaker score might lead to stricter conditions or a reduced loan amount. It can also trigger Lender’s Mortgage Insurance (LMI), even if you have a sufficient deposit, adding to your costs.

Investment Loans

Similar to home loans, a strong credit score is crucial for property investors seeking finance. Lenders will scrutinise your personal credit history to gauge your reliability as a borrower, especially if the investment is tied to your personal finances. A good score ensures access to competitive rates and favourable terms, essential for maximising returns on investment properties.

Business Loans

For business owners, especially sole traders and small to medium enterprises (SMEs), your personal credit score often heavily influences your ability to secure business finance.

Eligibility and Terms: Lenders consider your personal credit score as an indicator of your financial management skills. A high score increases your chances of approval for business loans and can lead to more attractive terms, such as lower interest rates. Traditional banks typically look for scores above 600.
Access to Lenders: Businesses with higher scores may qualify for loans from traditional banks, which often offer better terms. Those with lower scores might need to explore alternative lenders, which could come with higher interest rates and shorter repayment periods.
Separate Business Credit: While a personal score is critical, businesses can also build a separate business credit file through their financial transactions and repayment history with suppliers and creditors.

Common Misconceptions About Credit Scores

“Checking my credit score will harm it.” Not true! Checking your own credit score (a “soft inquiry”) has no impact on your score. It’s a smart financial habit to review your report regularly.
“My score is fixed forever.” Your credit score is dynamic and changes as new information is added or removed from your credit report. It reflects your credit situation at the time it’s requested.
“Closing old credit accounts is always good.” While reducing the number of credit cards can be beneficial, closing old accounts can sometimes shorten your credit history and potentially impact your score, especially if they were long-standing, well-managed accounts.

Practical Strategies to Improve Your Credit Score

Improving your credit score is a marathon, not a sprint, but consistent effort can yield significant results. Here are actionable steps you can take:

1. Pay All Bills on Time, Every Time: This is the most critical factor. Set up direct debits or calendar reminders for your mortgage, rent, credit card, personal loan, utility bills, and phone contracts. A consistent record of timely payments demonstrates reliability. Even catching up on a missed payment within 14 days can prevent it from being reported as an arrears.

2. Reduce Your Debt and Credit Utilisation: Aim to keep your credit card balances well below your credit limits (ideally under 30%). Paying down existing debts signals responsible credit management.

3. Limit New Credit Applications: Each “hard inquiry” from a lender can temporarily lower your score. Avoid applying for multiple credit cards or loans in a short period. Space out your applications if you need new credit.

4. Regularly Check Your Credit Report: You are entitled to a free copy of your credit report from each of the three main CRBs (Equifax, Experian, illion) every three months. Review it carefully for any inaccuracies or fraudulent activity.

5. Dispute Errors Promptly: If you find incorrect information on your report, contact the relevant CRB and the credit provider to dispute it. Correcting errors can quickly improve your score.

6. Maintain a Stable Credit History: The longer your positive credit history, the better. Avoid frequently opening and closing accounts.

7. Build Savings: Demonstrating a healthy savings history can also be viewed positively by lenders, showing financial stability beyond just managing debt.

8. Seek Financial Hardship Assistance (if needed): If you’re struggling to make payments, contact your credit provider immediately to discuss a financial hardship arrangement. This can protect your credit score from being negatively impacted.

When to Seek Expert Help from SBS Lending

Understanding and improving your credit score can feel overwhelming, especially when you’re preparing for a significant financial step like buying a home or expanding your business. This is where SBS Lending comes in.

Our experienced mortgage brokers and finance specialists can:

Help you understand your current credit position: We can review your situation and offer personalised advice on how to strengthen your credit profile.
Guide you through the credit repair process: If your score needs a boost, we can help you identify specific strategies and connect you with resources.
Match you with the right lenders: Even with a less-than-perfect score, we have access to a wide panel of lenders and can help you find options that suit your unique circumstances.
Structure your loan application: We know what lenders look for and can help present your application in the best possible light.

Don’t let your credit score hold you back from achieving your financial goals. Partner with SBS Lending to navigate the complexities of finance with confidence.

Conclusion

Your credit score is an indispensable component of your financial identity in Australia. By understanding how it’s calculated, its impact on your loan applications, and proactively taking steps to improve it, you can unlock better borrowing opportunities and secure a healthier financial future. If you have any questions or need tailored advice on your credit score and loan options, the team at SBS Lending is here to help.