When it comes to the home loan approval process, your credit score rating is a vital number revealing key insights to lenders about your financial health.
With interest rates back on the rise, property prices are expected to grow less this year than in 2025, opening up options for those hoping to jump on the ladder.
Having a good credit ratings is crucial to securing your loan, but hidden several red flags could mean a mortgage is out of reach before you even get properly underway.
According to New South Wales-based Mortgage Choice broker Kelly Carter, a credit rating is among the five ‘C’s’ of credit, which lenders use when determining if a loan application should be successful.
Ms Carter says the five ‘C’s’ include character, capacity, capital, collateral and conditions, and together help lenders determine whether you will be a secure and safe customer.
“So when we're looking at character, we are looking at your credit history and your conduct, it is to make sure that you are of good character,” she explains.
“Capacity – so do you have the ability to repay? Can the client show the lender that they can pay the repayment without putting themselves into financial stress, and it’s also having a look at their existing liabilities.”
Lenders need to be fully convinced of your capacity to repay. Picture: Getty
A credit report is basically an individual scorecard which details your borrowing history over the last five years, in addition to all your inquiries for things such as credit cards and personal loans, even if you did not actually take them up, Ms Carter says.
“It's a really quick way for the lender to determine, are you of good character? Because they can see all of the application inquiries, and they can see a number of different things all about you on one report.”
For a mortgage broker, there are a number of steps and processes they carry out to ensure their client is suitable but a credit score is “something bigger,” Ms Carter says.
“It does show us what happened in the past, it tells a little bit of a story and obviously there are stories behind everything that we see on paper, but some lenders will judge you first based on your credit report.
“If your credit report is too low or is not where it needs to be, you would be declined, regardless of the story behind it.”
A credit score is calculated based on what's in your credit report, and comprises of the amount of money you’ve borrowed; the number of credit applications you’ve made and whether you pay on time.
Depending on the credit reporting agency, your credit score will be between zero and either 1000 or 1200.
Peter Koulizos, Master of Property at the University of Adelaide, says a credit score is a pivotal part of a lender’s assessment process and determines the risk that the lender is taking in lending you money, hence determining your interest rate.
“That'll determine how much ‘skin you have in the game’, in other words, how much deposit you've got to pay, and probably most importantly, determine whether they lend you the money or not,” he says.
A big pitfall people make when it comes to finding out their credit score is the impact a late payment on a utility or phone bill can have.
“Those little things, they trigger alarm bells in the lender because they think, ‘If you can't even make, let's say, a $100 payment on a phone (bill) on time, what chance you've got of making regular payments of thousands of dollars for the next few years?’” he says.
If you have previously been declared bankrupt or things have not gone well for you in the past, not all hope is lost, Mr Koulizos says.
“It's really the last 12 to 24 months that lenders will be looking at closely,” he explains.
“If you haven't been good whilst you're saving for your deposit, make sure that you make all your repayments on time, whether they're telephone bills, water bills. If you are forgetful, just make automatic regular payments.”
Your credit report can be improved, Ms Carter says, but it will take time and consistency.
“But first I would start off with just having a look at your report and understanding what's impacting it,” she says.
“Take time to assess your budget, and obviously focus on managing your cash flow rather than applying for debt and make that as effective as possible, and again, making sure that all of your bills are paid on time.”
This article first appeared Mortgage Choice and has been republished with permission.
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