How credit scoring works
Since the GFC, banks have fine-tuned their policies, using years of data patterns, to avoid lending to people who will end up defaulting. The less mortgage arrears they have on their own books, the more favourably they are looked upon by their own financial backers; usually overseas wholesale lenders.
Each bank’s own scoring system is a closely held secret; it’s not known to mortgage brokers, bank managers, or even credit assessors.
Each bank has its own credit score categories, but the main consistencies are as follows:
- Every time you make a loan inquiry with a lender, it shows up on your credit score. This is regardless of whether it was accepted or rejected. The lenders can only see that an inquiry was made, not what the result was.
- Your credit score is a rating out of 1,200. Anything above 800 is considered reasonable. A bad score will be down around the 600 mark. Defaults can affect your score significantly, but according to Daniels, there is no way of knowing how much.
- An important factor is your net asset position, which represents your age, your income and your net assets. For example, if you are 50 years old, you earn $200,000 a year and you only have $10 in net assets, you won’t get a loan.
- Credit scores are aligned to proposed loan-to-value ratios (LVR). If you want to borrow at as 60% LVR, inquiries will not affect your chance as much as if you wanted to borrow at 95% LVR.
- Everything on your loan application form is subject to credit scoring. This includes where you live, how long you’ve been in your job, how long you’ve lived in the one premises and so on.
If you leave any field blank on your application, it will hurt your chances. For example, you might have $300,000 in super, but forget to fill out that question, so you are given the worst possible rating for that field.
You cannot appeal a bad credit score or a rejection. You have to wait six months until your record is clean.
You can find out your credit score by applying online through Veda at mycreditfile.com.au.
To discuss this article or anything to do with your finances, please call our office today and we will be happy to assist you.