Credit Scores – what are the banks looking for?
It’s a number of great importance, but you may have no idea what it actually is. Your credit score is determined by your financial history—factors such as how you have dealt with repayments, any outstanding debts you have, how many accounts you’ve applied for, had, and for how long.
If your client has had a less than stellar relationship with their finances, the reality is that it will be harder to get a loan. The banks scrutinise individual credit scores in order to determine whether the applicant is a reliable borrower or will be more of a risk.
While you can’t erase your past, it’s worth knowing what you’re dealing with before you approach the lender so you can be prepared. Your client can request the details of their credit score from Equifax Australia (previously known as Veda). It’s free to receive a copy of this report annually, and generally takes up to 10 working days to be processed. If you need the report straight away, they can pay for a one day turn-around, which costs around $60. You can also pay this fee if you need another report within the year.
So what can you do if the report confirms worries, and the three digit credit score is low? While this isn’t of course ideal, it doesn’t mean they need to kiss the loan goodbye.
Firstly, start working on improving their score (the higher it is, the better). Put a concrete plan in place to pay off the existing debt, chipping away at what they can. Make sure they’re vigilant with all of your repayments, even their phone or utility bills, so that they don’t end up with late fees or unpaid accounts.
The bank will also consider other components, such as income. The higher it is, the better, as they’ll presume that it’s more likely they’ll be able to meet the loan repayments. However if the mortgage is also high, this could work against your client despite their healthy wage, due to the debt-to-income ratio. And if they’ve changed jobs recently or frequently, this could impact their chances, as employment history is also analysed.
Applying for a loan with a shorter term can make it easier to get, and a large down payment is music to the ears of a lender (as your loan amount request is likely to be lower). The amount of collateral and liquid assets they may have will also be considered.
So while a credit score holds much weight, it’s not the only deciding factor when it comes to lending. Yet there are benefits to improving it, increasing your chances of success.
We’re here to help you work with your client’s current credit score, while improving it for the future, so get in contact with us today.