If you’re considering selling your home, having a clear picture of your financial position is a must. Before you can start seriously searching for a new home you need to understand not only how much your existing house could sell for, but also how much you can borrow.
While every lender has their own criteria and requirements that need to be satisfied before they will offer you finance, your credit score plays a big part in their final decision. Also known as your credit rating, your score is used to assess your potential risk to default. It also helps them decide how much to lend you and may be a factor in determining the interest rate you are offered.
Understanding your credit score before you sell your home is important. If you plan to upgrade to a bigger house, or to move to a better location, chances are, you’ll be relying on some sort of loan to finance your next purchase – which means you’ll need a healthy score. On top of this, you should be aware of how certain actions you take when selling your home can affect your credit score, so you don’t harm your chances of getting the loan you need to buy your next home.
So, if you’re unsure what your current rating is, how it is calculated, and how you can improve it, read on to learn all you need to know about your credit score when selling your home.
What is a Credit Score?
Your credit score is a computer-generated number provided by a credit reporting agency (CRB) using the information found on your credit file. Your score will be a number between zero and 1,200 (or zero and 1,000 depending on the CRB) and is based on an analysis of all the listings on your credit file at that moment in time.
Why Does Your Credit Score Matter?
When you apply for a loan or other form of credit, one of the first things a potential lender will do is check your credit score. They’ll use it, along with other relevant information to decide if they should provide you with finance and if so, how much. If your credit score is high, you have a good chance of obtaining finance – but if your score is below average, it will be much harder to find a lender who is willing to provide you with credit.
What Does Your Credit File Include?
If you’re like most people and have applied for finance at some stage in your life, you’ll have a credit file. This report includes personal and financial information collected by credit reporting agencies which is then used to determine your credit score. Your credit file will include:
- Relevant personal information (e.g. your age, address, employer)
- Your past and current credit providers (banks, utilities, phone, etc.)
- Credit enquiries and applications (whether you accepted them or not)
- How much credit you have borrowed (loans, credit cards, retail cards, etc.)
- Overdue or unpaid credit (including debt and personal insolvency agreements).
Recent changes have allowed additional information, such as your loan and credit card repayment amounts to be included on your credit report to provide lenders with a bigger picture of your circumstances. Your credit file now shows how often you make repayments, which can help to offset a blemish and improve your credit score (if you make your payments on time).
How is Your Credit Score Calculated?
When a request is made, the CRB will analyse the information on your credit file using their own algorithms to calculate your credit score. While the exact way they calculate your score is largely unknown, the key areas that will impact your rating include:
- Credit enquiries: Each time you apply for a loan or other form of credit it shows up on your file - and if you have a high number of enquires in the past five years it will lower your score.
- Loan repayment history: If you’ve missed payments on current or previous loans it will reduce your rating – but if your history shows you’re always on time it will improve it.
- Adverse events: If you have a default, court judgement or bankruptcy listed on your file, it will reduce your score significantly.
- Your liabilities: If you have any unsecured debts such as personal loans and credit cards with high limits (even if they are not maxed out) you will likely be viewed as high-risk.
- Your credit history: If you have a long solid history of good credit, it will help your score, while a black mark or short history will reduce it.
- Personal information: How long you have been in your current address and job also plays a part – for example, if you’ve been in either less than six months, it can lower your rating.
- Amount and type of finance: Your score can also be affected by the type and amount of finance you request – e.g. a personal loan for an undisclosed reason is viewed as a higher level of risk compared to a mortgage, which means your score may come back different.
- Type of lender: Who you approach can also have an impact, as traditional banks could have a different level of risk assessment for potential borrowers than a short-term loan provider.
How to Check Your Credit Score
In Australia, your credit file is held by credit reporting bodies, however you are entitled to check your credit score for free once every year. On top of this, you can also ask for a copy if you have applied for credit in the last 90 days and have been knocked back, or if you have lodged a correction request to amend incorrect information on your file and have been advised it has been fixed.
To find out your credit score, you’ll need to contact a CRB – but be aware that your rating can vary depending on the CRB you (or your lender) apply to. There are three CRB scores commonly used in Australia – the Equifax (formerly Veda), Experian and illion (formerly Dun and Bradstreet). You can contact the CRB by phone or request your score online. If applying online, be sure to use reputable sites, such as the following, which are recommended by the Australian Securities and Investments Commissions (ASIC):
- Credit Savvy (Experian score)
- Credit Simple (illion score)
- Finder (Experian score)
- GetCreditScore (Equifax score)
- WisrCredit (Equifax and Experian score)
Why Should You Check Your Credit Score?
If you’re considering applying for finance, it’s a good idea to check your credit score. That way, you can be prepared when you approach lenders, and be realistic in the amount you request which gives you a better chance of success. You can also check that all the information listed is correct, as occasionally there can be duplicate listings or data that is wrong which can unnecessarily harm your credit score. You should also be on the lookout for fraudulent activity where your personal information may have been stolen or used without your consent. If you need to request a change, contact the credit reporting agency as they can often rectify small errors on the spot. If not, they can advise what you need to do to sort it out.
What is a Good Credit Score?
So, you’ve found out your credit score – but what does it actually mean? Well, if you’re looking at an Equifax score, you’ll have a number between zero and 1,200, and the higher your score, the better your rating. Credit scores fall into one of five categories: below average to average (0-509), average (510-621), good (622-725), very good (726-832) and excellent (833-1200). Keep in mind that while having a high score is great, it doesn’t guarantee you will be approved – your lender will use your score in combination with their own criteria.
Which Factors Affect Your Credit Score?
Some of the things that affect your credit score are obvious such as loan defaults, however there are other factors that many people are not aware of. For example, if you apply for multiple loans or credit cards within a short period of time, it immediately puts a red flag on your credit file. While you may be just shopping around trying to get the best interest rate or terms, on your credit file multiple credit enquiries is seen as a sign of financial distress. Even if you don’t proceed with any of the loans or credit, without realising it, you are doing serious damage to your credit score.
Can You Improve Your Credit Score?
If your credit score is lower than you’d like, all is not lost! There are a few things you can do both in the short and longer term to boost it. These include:
- Limiting your credit applications and enquiries
- Reducing your credit card limits
- Making your mortgage, loan and credit card repayments on time
- Paying your bills and rent on or before the due date
- Consolidating credit card and personal loan debts
- Paying off your credit card in full every month.
Your score may also improve without you changing any of your financial habits as new information is added or removed. For example, a creditor may include your repayment history showing regular on-time payments, or an expired listing of a late or defaulted payment may be removed.
Does Selling Your House Affect Your Credit Score?
When you sell your home your credit score may change, but this depends on your circumstances. While it may seem like a big tick to pay off a large debt like a mortgage, having an instalment loan on your file where regular on-time payments are being made is actually good for your rating. However, when you sell your home and pay off the mortgage your repayment history will remain on your file, which means your score won’t be impacted all that much.
How Selling Your Home Can Improve or Lower Your Credit Score
One way your score can be improved when you sell your home is if you have the extra funds available after the sale to pay down some of your other debt. For example, if you pay off your credit cards and reduce the credit limit, your score may get a significant boost. On the other hand, if your mortgage is the only instalment type of loan you have and you choose to rent instead of buy, your credit score may take a slight dip.
Your Credit Score Matters, So Take the Time to Understand It
While it may not be something you think about all that often, keeping an eye on your credit score and having a good understanding of the factors that influence it is a smart move. That way, if it’s not where you’d like it to be you can take steps to improve it, to give yourself the best chance of success when you next require credit.
And importantly, if you’re ready to sell your home, you’re in a better position to understand your borrowing power – and if you choose to work with us, you’ll get a guaranteed price offer on your home, plus any upside. This removes the uncertainty on your sale price as you’ll know upfront how much funds you’ll have available as a minimum to contribute to your purchase – so you can search for the home of your dreams with freedom and confidence, minus the stress.
Ready to sell your home but feeling overwhelmed by the process? We’ll make sure you get the best possible result, with zero hassle. If you’d like to find out how to get a guaranteed price offer on your home and be paid out in as little as 7 days, get in touch with our team for an obligation-free chat today.