Whenever you apply for a mortgage, a personal loan, a business loan or a credit card, the bank will automatically run a credit check on you.
It takes them a matter a seconds to tap into a database which shows if you are a credit risk or not. In a matter of seconds your loan application could be refused if your credit file is not up-to-scratch.
The images of credit files below compares a good credit report with a not-so-good one. Not surprisingly, the further into the red, the greater the likelihood of a refusal. A green is more likely to generate an approval.
Good Credit Report
Not-so-good Credit Report
Before you apply for a loan, there are a number of things you can do to work out how the banks will assess your credit-worthiness.
First, free of charge, you have a right to view your credit file. A simple application to www.mycreditfile.com.au will provide you this printed report and you will know what the banks know about your credit rating.
If your credit file is not that crash-hot and you are in no rush to get finance, there are a number of things you can do to improve your credit score. These include:
- Start paying your bills ahead of time – every time you pay a telephone or gas bill early, you earn brownie points with the credit agencies. This will improve your credit score
- Stop making credit enquiries – if you ever go into a Harvey Norman or Dick Smith and apply for some HP arrangement, the retailer will run a credit check on you. The more you are seen shopping around for credit (even if you decide not to go ahead) the worse your credit score will be.
- Don’t move! – I know this sounds facetious, but the more you move home, the riskier you are seen to be. This is because the credit agencies see you as less stable than someone who has stayed in the same spot for 20-odd years.
- Pay off any outstanding defaults. Some banks will accept applicants with small defaults so long as they are no-longer outstanding. You may have to pay that bill that you have been disputing and get evidence that it has happened
But, if you are in a rush to arrange finance there are a number of things you can still do to get that loan. Good mortgage brokers know that some banks attach more importance to credit scoring than others. So, rather than just going to your bank for a loan, you may want to get a broker to do the work for you; they will know the best institution to place it so that you get an approval.
If you are unhappy with your credit score and think it is unjustifiable, you may be better-off if you challenging the defaults in some way. We have all heard horror stories about bills for utilities and telcos. If the banks see that you are formally challenging a bill via the relevant ombudsman, they are more likely to see your loan application as genuine.