ELI5: How does credit scoring work?

Any general questions you might have in regards to loans and finance.
Suraj
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Joined: Tue Apr 23, 2019 2:38 pm

ELI5: How does credit scoring work?

Postby Suraj » Tue Apr 23, 2019 2:39 pm

As I understand it, a good credit score should increase my chances at home loan approval. My Equifax Score is 620 which is slightly above average. I guess what I’m trying to find out is how does the lender’s internal assessment work.
I’ve heard they have their own credit scoring system, can you explain?

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Otto Dargan
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Re: ELI5: How does credit scoring work?

Postby Otto Dargan » Tue Apr 23, 2019 3:57 pm

Hello Suraj. Welcome to the forums.

That’s right, lenders have their own internal automated credit scoring system that takes into account information from your credit file and your mortgage application. An Equifax Score of 600 is considered good and will definitely factor in as a positive aspect of your mortgage application.

You can use our credit score calculator which uses a similar method to that used by banks and Lenders Mortgage Insurers to assess loans. It can help you identify potential issues with your home loan application.

Give us a call on 1300 889 743 or fill in our free assessment form to find out if you qualify for a home loan.

Cheers,
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

Suraj
Posts: 3
Joined: Tue Apr 23, 2019 2:38 pm

Re: ELI5: How does credit scoring work?

Postby Suraj » Tue Apr 23, 2019 4:29 pm

A few months ago, I was declined by CBA for a mortgage, apparently, I failed their credit score. I was surprised, to say the least. I didn’t have enough time to apply for another mortgage with a different lender. Now, similar properties are being listed so I’m trying to understand why I failed their credit score. Can you list issues I and other people may have had?

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Otto Dargan
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Re: ELI5: How does credit scoring work?

Postby Otto Dargan » Tue Apr 23, 2019 6:34 pm

Hi Suraj,

We’ve created a list of all the common reasons why people fail a bank’s credit score and put them into three categories:

Your personal situation:
  • Employment: Lenders like to see you’ve been in your current job for at least 6 to 12 months (some exceptions apply).
  • Genuine savings: You must have 5% of the purchase price that you’ve saved up yourself if you’re borrowing over 80% of the value of a property.
  • Location: The location of the property you’re planning to purchase must be acceptable to the bank.
  • Stability: If you change jobs or move frequently, the banks see you as unstable.
  • Assets and liabilities: Your assets need to be proportionate to your age and income.
  • Amount of unsecured debt: A significant number of credit cards, personal loans may see your loan may be declined.
  • Industry: If you’re employed in a fluctuating industry such as mining or construction, or are employed on a casual or contract basis, your credit score will be lower.

Your credit file:
  • Too many credit enquiries are one of the reasons many people with good scores fail the bank’s credit score.
  • Having no credit history is also a high risk for the banks so they tend to lower your score.
  • Having bad credit history would see you failing many lender’s credit score.

Your home loan application:
  • Bank policy: Each bank has its own benchmarks which if not met will result in an immediate decline.
  • Loan amount: Larger loan sizes are known to be higher risk, so, you need to be in a strong position to qualify.
  • Loan to Value Ratio (LVR): Borrowing at 90% to 95% of the property is a high risk.
  • Incomplete application: Some lenders like CBA lower your score if you submit an incomplete application.
  • Serviceability: It determines essentially how much you can borrow.
  • Loan purpose: Refinancing, debt consolidation and equity releases are comparatively high risk and so are credit-scored less favourably.

Cheers,
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

Suraj
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Joined: Tue Apr 23, 2019 2:38 pm

Re: ELI5: How does credit scoring work?

Postby Suraj » Tue Apr 23, 2019 6:45 pm

You mentioned credit enquiries, I simply don’t understand why that’s an issue.
Shouldn’t you be able to shop around for the best interest rate and loan terms?

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Otto Dargan
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Re: ELI5: How does credit scoring work?

Postby Otto Dargan » Tue Apr 23, 2019 7:54 pm

Hi Suraj,

A lot of people don’t realise this but as few as one or two enquiries on your credit file in the last six months is enough to make you fail the credit score of several banks. Too many credit enquiries from a number of different lenders in a short time frame may look as if you’re spread very thin financially or that you were unable to successfully acquire credit with other lenders. This raises red flags and reduces your credit score.

As mortgage brokers, we will do a full assessment and recommend the best lenders suited to your needs chosen from our panel of 40 lenders.

Give us a call on 1300 889 743 or fill in our free assessment form to find out if you qualify for a home loan with the most competitive interest rates.

Cheers,
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts


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