Determining your credit score and reviewing the information found in your credit report is an important step when you're buying a home.
Despite this, many Australians don't understand how to acquire or interpret a credit report. We thought we'd give you all the information you need to figure out where you stand financially.
How credit reporting works
You may be wondering how credit reporting agencies are able to access information related to your financial activities. Creditors, government agencies and banks all report this information to credit reporting agencies that then analyse all the data.
The purpose of a credit report is to provide lenders with a detailed picture of your financial habits.
Lenders use the information found in a report to determine whether lending to you would be risky. If you have a history of missing payments or paying late, you may not be approved for financing or may not receive the same discounted rate as another borrower with a better financial history. Lenders may charge people with poor credit histories a higher interest rate to make up for the additional risk that they are taking on.
There are several agencies that you can request a free credit report from once a year and your mortgage broker will easily collect your data and submit your request.
The contents of a credit report
So what information is actually included in your credit report? Personal information including your full name, current address and employer will be listed. Tax returns and voting data are typically used as a source for this information.
All of your credit accounts will also be listed. This includes credit cards, mortgages, auto loans and private loans. The original amount due, the current balance and the interest rate are all contained in a credit report.
Your payment history for each credit account will be detailed. If you have paid late or have failed to make a payment entirely, this information will be included. Delinquencies negatively impact your credit score.
Judgements made against you that relate to your finances are listed in your credit report. This includes bankruptcies and foreclosures. Negative information is typically removed from your report after 10 years.
Improving your credit score
You need to improve your credit score before you apply for a mortgage to boost your chances of being approved while keeping your interest rate down. Start by requesting a report from a credit reporting agency. You can use this information to determine where you need to make improvements. Credit repair agencies can help you improve your credit, or you can work to pay down debts and negotiate with creditors on your own.
Some simple steps to start with:
- Focus on paying all of your bills on time. This means everything from credit cards, to phone bills to electricity. It all counts, so the sooner you make the changes, the better.
- Understand how your credit score is calculated. Are you negatively impacted by your outstanding debts, do you pay your bills on time or have you recently applied for more credit?
- If you believe there are any errors, contact your financial institution to start an investigation.
- Beware of "credit repair", "credit fix" or "debt solution" companies advertising a quick fix for your credit rating. Keep an eye out for scams on Money Smart.
Your mortgage broker can help refer you to credit reporting agencies and a financial adviser to help get your finances on track.