When it comes to home loans, your credit score can play a big part in the success or otherwise of your application. The higher your score, the more likely it is for you to be approved. A low score, on the other hand, can mean paying higher interest rates and fees or even being declined altogether.

However, credit scores are not set in stone. They change over time depending on your financial behaviour. So if your credit score isn’t as high as you like, it’s important not to panic as it can be improved.

What is a credit score?

Your credit score is based on your past record of ‘managing credit’ (i.e. borrowing money and paying bills).

It takes into account:

• The amount of money you’ve borrowed
• Whether you pay on time
• The number of credit applications you’ve made

Many lenders use your credit score when they work out how risky it is to lend you money.

How is your credit score calculated?

There are three major credit bureaus in Australia who assign credit scores: Equifax, Experian, Illion. Each bureau calculates them differently, weighing up both positive and negative financial behaviours on your credit report to assign a score. Depending on the bureau, this score will be between 0 and either 1,000 or 1,200.

By law, you are entitled to check your credit report once a year for free. It’s a good idea to do this as it can give you an accurate picture of your current financial standing.

How to improve your credit score?

If your credit score isn’t as good as you were hoping, there are a number of steps you can take to get it back on track.

Fix errors on your credit report

Go through your credit report carefully to check that all the information is accurate. Look out for incorrect debt or repayment amounts, duplicate listings, as well as ensuring that all listed debts and loans are yours. If you do find any errors, contact the credit bureau to have the information corrected.

Stop applying for credit

Each time you apply for credit this information is added to your credit report. This, in turn, can negatively impact your credit score, especially if you make multiple applications over a short period of time.

Make all loan repayments on time

Having debt is not necessarily viewed as a bad thing when it comes to credit scores. What’s more important is demonstrating you can manage it responsibly. So if you consistently make repayments on time your score can improve.

Pay off your credit card each month

Another way of demonstrating you are in control of your finances is to pay off your credit cards in full every month. If this isn’t possible, pay off as much as you reasonably can afford above the minimum repayment.

Pay bills on time

Paying your bills on time is a simple way to improve your score. This is especially important if the bill is worth $150 or more. Failure to pay these bills on time can mean they’re marked as a default. Defaults stay on your report for five years.

Close out loans and extra credit cards

The total amount of credit you have access to can impact your credit score negatively. While this can be offset by making repayments on time, paying off loans in full and closing extra credit cards may also gain you points. If you don’t want to cut up your credit cards, lowering their limits may also have a positive impact.

Consolidate your debt

If you are juggling multiple high-interest debts such as credit cards and personal loans, consolidating them into your home loan can have a positive impact on your credit score. As well as making it easier to manage your repayments, it can show that you manage debt responsibly. Consolidating your debts into a home loan may also save you money in the long run.