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How to improve your credit for better mortgage terms

By Andrew Bell

When trying to buy a home, one of the most important things you can do is make sure your finances are in order. While that obviously means building up the tens of thousands of dollars in savings that will likely be required to make a sizable deposit, it also entails doing more to make sure your credit score is in good shape.

The reason why is simple: Lenders use your credit score to determine not only whether you are eligible for a home loan in the first place, but also to establish the terms of that financing. The better your score, the better your interest rate and other costs are likely to be. With that in mind, the difference between an excellent credit score and one that's merely "good," could add up to being worth thousands of dollars over the life of the loan.

Know what goes into it

Generally speaking, there are numerous factors that go into calculating your credit score. Every scoring company calculates scores and includes or excludes credit data differently, but broadly, these include:

  • The kind of credit you currently carry (or have applied for recently)
  • The number of accounts you've applied for
  • How much you owe right now, how long you've held your current accounts on average
  • Unique personal information such as age and employment status
  • Whether you've fallen behind on bills in the past, or even defaulted

Within these issues, there a number of other things to consider, such as whether the amount you owe on credit cards makes up a significant portion of your total borrowing limits, how recently you last missed a payment and so on. Again, there are no real hard and fast rules for how companies have to calculate these scores, but they all look at many of these issues.

How to improve

Once you know what goes into calculating a credit score in the first place, even on a basic level, it becomes easier to address the potential problems that might be holding your score back from at least approaching the famous four-digit threshold.

For instance, you should certainly try to pay down your outstanding balances as much as you can – even as you're trying to increase the amount of money you have in savings. This will increase your financial stability, reduce your monthly bills (meaning you have more to put into savings later) and make you a more attractive borrower for would-be lenders.

Likewise, it's a good idea to avoid applying for new credit that is unrelated to your mortgage efforts at this time. This may show lenders you are experiencing cash flow problems at worst, but at best it will still reduce the average age of your current accounts.

Finally – and certainly most important – you have to make sure you never miss a payment deadline for any outstanding credit, even if it's by a single day. The impact even a slight misstep can have on your credit score is massive, potentially knocking it down by more than 20 per cent even if you have been perfectly diligent about your payments in the past.

While improving your credit isn't always easy, it is important work to do when you're trying to buy a home, and even a few months of hard work could pay off more than you expect.

At Ray White Surfers Paradise, we have helped countless shoppers – whether they were buying for the first time or had gone through the process multiple times before – find the right home for them, based on their finances and the features they were looking for. Give us a call today to find out how we can do the same for you.

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