If you’re trying to reduce home loans, have a look at your credit score.
Your credit score is more than just a box-ticking exercise during a home loan application. Your score directly influences the interest rate you’ll be offered by lenders. If you play your cards right, you can save thousands of dollars on the life of your loan just by boosting your credit score with a few simple strategies.
We often see the phrase “must have a good credit rating” on loan products such as mortgages, personal loans and credit cards. The term ‘good’ simply means you have to hit the minimum score to be approved. It’s the specific number on your credit score that determines how many lenders will look at your application and at what rate they’ll set your interest.
In short: your credit score determines whether you’re charged the lowest or highest rate of interest. So, it’s worth boosting that number as high as you can to try and reduce home loans.
What makes a good credit score?
There isn’t a blanket standard for credit scores, so it’s normal for it to vary between lenders and even credit reporting bureaus. To give you an idea, reporting bureau Equifax sets its categorisation like this:
- Average: 460 – 660
- Good: 661 – 734
- Very good: 735 – 852
- Excellent: 835 – 1200
While you may still get a loan with an ‘average’ credit score, you have more chance of a knock-back and you’ll be charged a higher interest rate. It’s when you get to 735+ (the ‘very good’ zone) that you’ll be able to tap into the best interest rates and a much larger pool of lenders.
How to boost your credit score to reduce home loans
So, you can see why it’s worth improving your credit score to save money on your loans. Let’s take a look at a few steps that will help boost your score quickly.
1. Check your credit score and correct any errors
Checking your score is as simple as searching ‘free credit report’ online. This is a ‘soft’ credit check, meaning it won’t affect your score the way it does when a lender does its own investigation.
On your report, you’ll be able to check for anything that’s incorrect (such as your personal details) or red flags that could indicate fraudulent activity, such as someone trying to apply for credit in your name. If you see abnormal activity, you can report it to the credit provider or the credit reporting bureau such as Equifax or Experion.
2. Apply for smaller credit for quick wins
Ironically, credit begets better credit. Applying for small lines of credit and paying them off responsibly can help boost your score quickly. For instance, you might apply for a low-cost credit card, such as one with no or low annual fees, and make sure it’s fully paid off every month.
3. Lower credit limits if you have credit cards
On the flip side, you can also reduce your limit if you already own a credit card. A smaller limit (especially if you’re already good at paying your card on time) shows you aren’t burdened by even the potential of large debt down the track.
4. Make a plan to reduce your other loans
Having fewer debts includes lowers your credit usage ratio, which is the percentage of the total amount of money you owe (your credit score loves a low ratio). Debt can include HECS, car loans, and other personal loans.
You can set up a repayment plan in your budget or talk to a financial professional about consolidating your loans, which can help you save money on interest.
You can also use other financial tools such as a balance transfer, which lets you roll credit card debt and sometimes even personal loans or Buy Now Pay Later debt onto one card with interest-free repayment periods.
5. Get rid of Buy Now Pay Later (BNPL) debt
Buy Now Pay Later is a form of credit even if these services aren’t yet required to do a credit check before you use them. Lenders will still look at your BNPL debt as money that you owe, which is a burden on your creditworthiness.
The goal is to pay off your BNPL debt as quickly as possible. If you’re already thinking about getting a credit card to help boost your score, you can look at cards with promotional 0% p.a. purchase offers that work in much the same way but will add to your credit score rather than weakening it.
It’s never a bad idea to keep your score in mind
Credit scores are something we usually don’t think about until we need them. While taking these steps will help boost your score, it may take weeks or months for your score to reflect your hard work.
If you’re looking to buy a home or you know you’ll be looking for a loan in the near future, it’s a good idea to take some steps now so your credit score is ship-shape – and ready to give you a better deal – as soon as you are.