If you’re reading this article, chances are you understand the importance of a good credit score in a mortgage application. But how do you increase it, exactly? Maybe you have a default listed on your file from several years ago, or maybe you have a habit of repeatedly applying for credit cards and personal loans.
Whatever the cause, it’s important that you understand how you can make your credit score more attractive to a lender.
With that said, here are 5 ways that you can accomplish this.
1. Reduce existing debt
This seems an obvious statement, but it bears repeating. If you have multiple credit cards or personal loans, there is no hiding this fact from a bank when they assess your credit report. Excessive credit negatively impacts on your borrowing capacity. Indeed, understand that most banks assess mortgage applications using the total credit limit of your commitments – regardless of whether an individual card has a balance of zero.
To reduce debt, do the obvious things like debt consolidation and paying more than just the interest each month. If there are some cards that you don’t use with a zero balance, consider cancelling them.
2. Keep track of your repayments
Credit reports contain your repayment history to licensed credit providers, but they exclude other repayments to household bills such as power, water, or internet. So why is it important to keep track of your repayments? These types of services can appear on your credit file as defaults if they exceed $150 in total and are more than 60 days overdue.
Regardless of whether the bill is credit-related or not, consistently paying them on time with no defaults demonstrates your reliability in making payments as a borrower. Setting up direct debits or spreadsheets to track individual bills are two ways you can stay on top of things.
3. Own a credit card
Although it may seem counter-intuitive, having zero debt does not improve your credit score or make you more creditworthy. Ultimately, lenders want to see demonstrated evidence of your ability to manage credit. You can begin this process by owning a single credit card and paying off the entire balance before the end of the interest-free period.
Of course, having access to credit is a balancing act. If you find yourself with too many credit cards, this may hurt your credit score no matter how good you are at managing them. If possible, apply for a credit card with a small limit and always use it for purchases that you can afford to pay back in full.
4. Reduce credit enquiries
When you apply for credit, a credit enquiry is listed on your report for five years – regardless of whether you were approved or rejected. The type of credit you applied for and the provider of the credit have some impact on your credit score - but the frequency and recentness are more important.
In other words, several recent credit enquiries can lead some banks to assume you’ve been declined and therefore, constitute a higher risk borrower. Be aware also that informal “trial” applications to get the best deal and pre-approved applications can also show up as enquiries on your file. While we’re on the subject of enquiries, note that applications for the credit report itself do not negatively impact on your score in any way.
5. Make sure your credit report is accurate
It might surprise some to learn that many Australian borrowers have mistakes on their credit files. Sometimes errors occur when credit is misused as a result of theft and identify fraud, but often they are just simple clerical mistakes made by the lender or report provider.
Look for items with inaccurate loan amounts or for expired items that should have dropped off your report. Once you pay a default, for example, your report should reflect this and should be removed completely after 5 years. If you suspect an error, contact the credit reporting body or the creditor concerned as soon as possible.
Conclusion
Credit score improvement is not an overnight process. Therefore, it is important to implement healthy financial habits as soon as possible and not on the day before your mortgage application. Simple things like reducing the number of credit enquiries and checking your report for errors are a good place to start. But long-term, it is reducing existing debt and consistently paying bills on time that will do the most to help increase your credit score.
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