The strongest tool in your application for a home loan, is a healthy credit score. It can literally have a bearing on whether you qualify for a home loan, and how much of a loan you can secure.
Every person who has ever used a credit facility has been recorded at a credit bureau. These bureaus exist to ensure that there is financial stability in the money market, and help lenders to reduce the risk of, and make better decisions about, loaning. In doing this they monitor consumers credit and their management of credit over years. And every time you apply for credit, be that for a small purchase or a major one, the financial institution will check this record.
These bureaus are not only valuable for credit providers, but for consumers as well. Most credit bureaus offer consumers an annual free check of their credit rating. It can provide many insights and influence how you manage your money or budget. This service also allows you to check if there are any defaults, notices or judgments against you, be that in error or in fact.
Three negative reasons for a low rating
Defaults are usually flighted by a credit provider when you have missed payments extending over a period of three to six months. Only once a creditor has confirmed settlement, and one year has passed, will the default flag be removed.
Notices are usually linked to sequestration, and remain on your credit report for five years, during which time you are required to restore your credit reputation.
Judgments are the worst, meaning any access to credit will be denied, and are usually related to a legal case, and will remain on your report for five years or until a court finds in your favour or you have paid in full.
Highs and lows
A credit score is usually reflected by a three-digit number between 0-999. It stands to reason that the higher the score, the more favourable position a person is in to negotiate for a better interest rate when applying for a home loan, although this is not guaranteed. An adverse credit rating will have the opposite effect.
How to correct a poor rating
Before applying for a home loan, you are advised to check your credit score, and even if it does reflect well, you may find there is room for improvement. If your score is below average, it’s not all doom and gloom however, because there are ways you can help improve your score:
- To avoid missing a monthly credit payment, set up automatic payments against your transactional or other banking account. Ensure you have an overdraft that can account for these bills should that be necessary.
- If you have unpaid debts, approach the credit provider and discuss how you can pay off the outstanding debt.
- Dispute any credit report inaccuracies by approaching the credit provider. If this is in error, request they update your information with the credit bureaus.
- Limit your spending on credit cards, and pay to zero the balance every month. If you cannot pay the balance, ensure you pay at least the minimum requirement every month.
- Create a budget that will help you keep your spending in check for the long-term.
- Don’t try to ‘fix’ your credit score through dodgy companies. No company can legally erase information from your file if it is accurate, rather take steps to improve your score on your own.
- Avoid all further debt, or limit it strictly, and this requires discipline.
Fixing a poor credit score may take time, but with consistent dedication and good decision-making you will be able to bounce back. It is advised that as you settle any debt, to recheck your credit score. It may mean putting off for a bit longer, your dreams of property ownership, but once you are in a healthier financial position, and your credit score reflects this, you’ll be able to start searching for the house you can afford.