How does my credit score affect my new loan application?

You may not realise it, but your credit score may have a bigger impact on obtaining a new loan than you think.

How is my credit score calculated?

Your credit score is a number that is generated based on a variety of personal and financial details, including:

• your existing loans and payment history
• your employment history
• number of credit applications
• any missed repayments

Your credit score is used to assess your reliability as a borrower. The higher your credit score, the less of a risk your lender will see you as, and the better your chance is to be approved for a loan. Your credit rating is important as it can impact the loan amount a lender is willing to lend a borrower.

How can I tell if my credit score is ‘bad’?

A higher credit score shows you are somewhat financially stable and are able to meet repayments on time. For instance, the main credit score model known as ‘Equifax’ ranges from 0 to 1,200, with anything below 622 indicating a ‘bad’ score. You are eligible for a free credit report each year here.

Depending on the range you fall in, lenders will have different perspectives on just how ‘bad’ your score may be. Although this system isn’t always the determining factor, it is generally left up to the lenders to decide if you are creditworthy or too much of a risk.

It is also possible to be unaware of your bad credit. Ensuring you are constantly maintaining and checking up on your credit history in case of any errors will help you for future applications of potential loans.

Got credit cards and other debts? Read our ultimate guide to debt consolidation.

What factors contribute to a bad credit score?

A number of factors contribute to your credit score which consequently will influence your access to a potential home loan. Lenders may also charge higher interest rates and reduce your credit limit if your credit score is low enough. Your application may also be declined entirely. Therefore, it is important to maintain a good credit score and improve it over time.

Borrowers should be knowledgeable of how to improve and maintain their credit rating as there are factors that harm it. These factors are listed below.

#1 Not meeting repayments

Continuously missing or delaying your loan repayments is detrimental to your credit score and will require more time to get back on track. These defaults will eventually show up on your credit file and will not look good to lenders when you apply for future loans. Even if they do not appear straight away, they still may influence your access to credit.

Lenders may also choose to reduce your credit limit if the delayed repayments persist and are evident on your credit report. Consequently, this will set a bad impression for when lenders follow up on your files and credit history.

You can ensure no payments are forgotten by setting up automatic direct debits. Keep in mind, late repayments may also lead to other serious offences, such as bankruptcies, that will highly influence your chances of obtaining a loan.

#2 Making multiple credit applications

It is highly important to keep your number of loan applications to a minimum, since each enquiry is marked on your report. Multiple enquiries can harm your credit score because lenders can view you as desperate for credit and potentially financially unstable.

It’s human nature to want or need something we can’t always afford, but opening more credit accounts isn’t the answer. It will increase the chance of debt and financial stress. For instance, although you may be approved for an application for a credit card, maxing out the entire card will appear on your credit report.

#3 Not keeping track of your credit usage and debt

As well as multiple applications or enquiries, having various financial commitments can negatively influence your credit score.

The more credit cards you have, the harder your access to borrowing becomes. Lenders will generally assess your credit card limits and usages that are typically listed on your credit report.

#4 Forgetting to check for errors on your credit report

Your credit report may not always be accurate. This is why it is crucial you are checking it every 12 months to ensure there aren’t any errors that may be harmful to your credit score and, in turn, will influence your ability to obtain a loan.

Can you get a home loan with bad credit?

Get free expert advice by chatting to a Home Loan Specialist. You can schedule a time for us to call you.