Credit in Australia is changing due to the Banking Royal Commission, changes to lending practices and the introduction of Comprehensive Credit Reporting. It is more important than ever to know how credit fit you are before applying for a home loan, personal loan, or anything credit related.
If you have ever completed a half or full marathon, you would know that you had to prepare for the event months in advance. You would have a fitness plan leading up to the event so that you knew you could complete the marathon within a certain time frame. Obtaining a home loan also requires preparation and planning, particularly if it is your first home purchase.
Below is your six-step plan to ensure you are credit fit.
1. Understand your credit score
Comprehensive Credit reporting (also known as Positive Credit Reporting) came into force on 1st July 2018. Previously, your credit report information included credit inquiries (loan and credit applications) and payment defaults, insolvencies, bankruptcies and debt agreements.
Now your credit report also includes:
- * The type and credit limit of accounts you have open;
- * Dates the accounts were opened and closed;
- * Current limit on each account; and
- * Up to 24 months of repayment history, including when you make your repayments on time and when you’re late.
- * This applies to home loans, car loans, credit cards and personal loans.
From September 2018, the big four banks had to share at least 50% of their customers comprehensive credit information. They will be required to share the full 100% of information by September 2019. It isn’t compulsory for other banks and lenders to share; however, it is expected that they will start to share comprehensive credit information as well.
The data is used to calculate your credit score. Your credit score is used by most lenders to assist in determining if they will approve or decline a loan for you. It is important that you take control of your credit file by checking what is on there and knowing what your score is. To find out where to access your credit file and credit score visit creditsmart.org.au
2. The absolute must!
To gain and maintain your credit fitness you must make sure your repayments are always made on time. This will assist in ensuring a healthy credit score.
3. Know your living expenses
Lenders don’t just look at how much you earn to determine how much they will lend you. They must also consider all your expenses. These include loan repayments, credit card repayments and your day to day living expenses. In the past lenders had generally made estimations about your living expenses, they now want documented proof of spending. This is done by closely scrutinising your expenses and confirming them against your bank and credit card statements. This level of scrutiny has increased recently and obtaining approval for a loan is much more difficult than in previous years.
4. Be credit fit before applying for a loan
Lenders will want to see your bank statements for up to the previous six months. It is important that you avoid unnecessary spending and big purchases in the six months leading up to applying for a loan. Consider this as training leading up to the purchase of your home. If you can’t reign in your spending in the six-month period, then how are you going to afford the home loan repayments over 30 years?
Also make sure your credit score is good. If you have a low credit score you may find it difficult to get a loan or you could be charged a higher interest rate. See creditsmart.org.au for tips on improving your credit score.
This also applies if you are looking to refinance your existing home loan.
5. Obtain a pre-approval
A pre-approval will confirm that you are eligible for a home loan up to a certain amount. You need to submit a full loan application and the lender will check your financial circumstances and decide if you meet their lending criteria and can afford to repay the loan. The lender will look closely at your savings and spending habits, check your credit history and credit score to determine if you are the type of customer they will lend money to.
The pre-approval will last between three to six months. This will give you time to confidently look for the property you wish to purchase. At Wyze Finance we can assist you with the process of obtaining a pre-approval.
6. Ask an expert for help
If this all seems overwhelming, don’t panic as a finance broker can assist you in becoming credit fit. A finance broker will review your personal and financial situation and set a plan for you to become credit fit. Once you are credit fit or you’re already at that stage, a finance broker can research suitable products on the market, and then support you through the loan application and settlement process. They can save you time and money by managing the loan home process for you.
Carla Richardson, founder of Wyze Finance, is a Finance Broker with over 20 years’ experience in lending. Carla is passionate about finding the right lending solutions for her clients to obtain their financial dreams.
If you would like assistance to become credit fit or have any questions about obtaining a loan, Talk to us today!
This page provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. All loan applications are subject to lenders terms and conditions, and eligibility criteria. Lender fees and charges will apply.