When preparing to apply for a mortgage, your credit score plays a significant role in determining the loan terms, interest rates, and approval odds.
A higher credit score can make the home-buying process much smoother, allowing you to secure better rates and conditions. If your score isn’t where it needs to be, don’t panic.
There are ways to improve your credit score before applying for a mortgage. In this article, we will cover practical steps and strategies to help boost your credit score and enhance your chances of mortgage approval.
If you are unsure where to start, consulting with a mortgage broker Clayton can provide personalised advice and insight into your credit score and mortgage options.
Understanding Credit Scores
Your credit score is a numerical representation of your creditworthiness. It is based on your credit history, including how well you’ve managed debt and made payments.
In Australia, credit scores typically range from 0 to 1,200, with scores above 600 considered good, while scores above 700 are considered excellent.
Factors that Affect Your Credit Score
Several key factors influence your credit score:
- Payment history: Timely payments on loans, credit cards, and bills are essential.
- Credit utilisation: The ratio of credit used compared to available credit.
- Length of credit history: How long you’ve been using credit.
- Types of credit used: A mix of credit accounts (e.g., credit cards, loans).
- Recent credit inquiries: Too many credit checks can negatively impact your score.
Understanding these factors will guide you as you work to improve your credit score before applying for a mortgage.
Step 1: Check Your Credit Report
Before taking any steps to improve your credit score, it’s important to first check your credit report for any errors or inaccuracies.
How to Obtain Your Credit Report
In Australia, you are entitled to a free credit report once a year from major credit reporting agencies like Equifax, Experian, and illion.
Reviewing your report will allow you to identify any discrepancies, such as incorrect personal details, missed payments that were made on time, or accounts that should have been closed.
Dispute Errors
If you find any errors on your credit report, dispute them with the credit bureau. Correcting mistakes can help improve your credit score.
Step 2: Pay Your Bills on Time
Payment history is one of the most important factors in determining your credit score. A history of late or missed payments can significantly damage your score, while timely payments can help improve it.
Set Up Reminders or Direct Debits
To ensure that you never miss a payment, set up reminders or arrange for automatic payments. This is especially important for credit cards, utility bills, and any other loans.
Catch Up on Missed Payments
If you have missed payments, focus on catching up. Making overdue payments will not only prevent further damage to your credit score but may also reduce any late fees or penalties.
Stay Current with All Bills
While focusing on your mortgage application, be sure to stay current on all other bills, including utilities, credit cards, and personal loans. Lenders will look at your overall financial habits, and consistent on-time payments will help portray a responsible image.
Step 3: Reduce Your Credit Card Balances
Credit utilisation, or the ratio of your credit card balances to available credit, is a major factor in your credit score. The lower your credit utilisation, the better your score will likely be.
Aim for Below 30% Utilisation
Ideally, you should aim to use less than 30% of your available credit. For example, if your credit limit is $5,000, try not to carry a balance higher than $1,500. This shows lenders that you are using credit responsibly without relying on it too heavily.
Pay Down High-Interest Debt First
If you have multiple credit cards or loans, focus on paying down those with the highest interest rates. This will save you money over time and improve your credit utilisation.
Avoid Closing Accounts
While it may seem like a good idea to close credit card accounts once they are paid off, doing so could harm your credit score. Closing an account reduces your available credit, which can increase your credit utilisation ratio and lower your score.
Step 4: Avoid Opening New Credit Accounts
When applying for a mortgage, every new credit inquiry can impact your credit score. Each time you apply for credit, an inquiry is made, and too many inquiries within a short period can make you seem desperate for credit, which may concern lenders.
Minimise Credit Applications
Before applying for a mortgage, avoid applying for new credit cards, loans, or any other forms of credit. New inquiries can lower your score temporarily, so it’s best to keep your credit activity to a minimum.
Be Cautious of Store Cards or Financing Offers
Store cards or financing offers may seem appealing with their discounts and special deals, but they can result in hard inquiries that impact your score. It’s best to resist these offers in the months leading up to your mortgage application.
Step 5: Consider a Secured Credit Card
If you have poor credit or no credit history, one way to rebuild or improve your credit score is by using a secured credit card. A secured card requires a deposit, which acts as your credit limit, and your usage is reported to credit bureaus.
How Secured Credit Cards Help
Using a secured card responsibly, by keeping the balance low and paying on time, can help build your credit history and raise your score. After a few months of good behaviour, you may be able to transition to a regular credit card.
Step 6: Keep Old Accounts Open
The length of your credit history makes up a portion of your credit score, so keeping older accounts open can help increase your score over time.
How Old Accounts Affect Your Score
Older accounts demonstrate a longer, more established credit history, which can make you seem like a more reliable borrower. Avoid closing accounts that are several years old, as they contribute positively to your credit profile.
Check for Fees
If you’re keeping old accounts open, ensure that they aren’t incurring high annual fees. Consider switching to a no-fee card to keep your accounts open without adding unnecessary expenses.
Step 7: Consider a Credit Repair Service
If your credit score is low due to past mistakes, you may want to consider working with a credit repair service. These services can help you identify ways to improve your credit, negotiate with creditors, and correct errors on your credit report.
How Credit Repair Works
Credit repair services work by reviewing your credit report, disputing any inaccuracies, and negotiating with creditors to remove or amend negative entries. However, ensure you research reputable services to avoid scams.
Conclusion
Improving your credit score before applying for a mortgage is an important step in securing the best loan terms and interest rates.
By following these practical steps, such as reviewing your credit report, paying bills on time, reducing debt, and avoiding unnecessary credit applications, you can increase your chances of securing a mortgage approval with favourable terms.
If you need expert advice or personalised guidance, reaching out to a mortgage broker Clayton can help you better navigate the mortgage process and find the right solution for your needs.
Frequently Asked Questions
How long does it take to improve my credit score before applying for a mortgage?
Improving your credit score can take time, and the amount of time required will depend on your starting point and how much effort you put into addressing negative marks. Some people may see improvements in a few months, while others may need a year or more. The key is consistency and patience.
Can I still get a mortgage if I have a low credit score?
While a low credit score may make it more difficult to secure a mortgage, it’s not impossible. Some lenders specialise in offering loans to borrowers with poor credit, though they may come with higher interest rates or stricter terms. If your score is low, consider working on improving it before applying for a mortgage to secure better terms.
How can I check my credit score?
In Australia, you can check your credit score for free through major credit reporting agencies such as Equifax, Experian, and illion. Many websites also offer free credit score checks, and some financial institutions provide free score access to their customers.