Test your credit score knowledge
Credit profile, score, score: if you’re thinking of getting a home loan, these are important terms to know more about.
What is a credit score?
All credit active people have a profile. This is a summary of your history with each credit provider you’ve ever dealt with and serves as a record of how well you’ve managed your accounts such as loan repayments, overdue debts, how often you’ve asked for credit and types of loans or credits , for which you have applied and the frequency of your applications.
How it works?
Credit reporting providers summarize your profile into something called a credit score. The score is between 0 and 1200, with the higher the number, the more likely you are to be able to repay the loan. Lenders review your credit profile and score to find out about your credit history and behavior and determine whether you can get a new loan. This information reassures lenders that you are good at paying back money to those you have borrowed from – ie. you are a “low risk” customer.
A good score not only makes you more likely to get your home loan application approved, but it also means you’ll qualify for a better interest rate. Of course, the other side of the coin is that if you have a poor score, you will be less likely to qualify for new loans. This protects the lender and those with low scores from taking out additional loans and becoming overstretched and indebted. In short, you will need to have a good credit score to get your home loan application approved.
That’s why it’s a good idea to first find out what your credit score is before applying for a loan and give yourself time to improve it before approaching a lender.
How to check your result?
A great place to start your research is the ASICs MoneySmart site. You can get a free credit score evaluation from a number of online providers that are listed on the MoneySmart site.
How to improve your score?
Improving your credit score starts with looking at your current financial situation and ways to improve it. Achieving good credit standing before you apply for a loan can increase your likelihood of being approved.
You can improve your score by:
- reducing your credit card limits
- consolidating multiple personal loans and/or credit cards
- limiting your credit inquiries
- paying your rent and bills on time
- paying the mortgage and other loans on time
- pay off your credit card in full each month
To avoid surprises, be prepared and know your credit score.
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