How credit scoring works

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Since the GFC, banks have fine-tuned their policies, using years of data patterns, to avoid lending to people who will end up defaulting. The less mortgage arrears they have on their own books, the more favourably they are looked upon by their own financial backers; usually overseas wholesale lenders.

Each bank’s own scoring system is a closely held secret; it’s not known to mortgage brokers, bank managers, or even credit assessors, according to Michael Daniels from Smartline.

“Only those in risk divisions in banks know and they’re the ones that set the scores,” he says.

Each bank has its own credit score categories, but the main consistencies are as follows:

-Every time you make a loan inquiry with a lender, it shows up on your credit score. This is regardless of whether it was accepted or rejected. The lenders can only see that an inquiry was made, not what the result was.

-Your credit score is a rating out of 1,200. Anything above 800 is considered reasonable. A bad score will be down around the 600 mark. Defaults can affect your score significantly, but according to Daniels, there is no way of knowing how much.

“An example that we saw recently was a $1,500 phone bill default,” he says. “The credit score was 630, though there were four inquiries made that year too, so they wouldn’t have helped either.”

-An important factor is your net asset position, which represents your age, your income and your net assets. For example, if you are 50 years old, you earn $200,000 a year and you only have $10 in net assets, you won’t get a loan.

“This is basically because lenders think that you should have a certain number of assets by that age,” says Daniels. “It indicates whether you have the right character to borrow money.”

-Credit scores are aligned to proposed LVRs. If you want to borrow at as 60% LVR, inquiries will not affect your chance as much as if you wanted to borrow at 95% LVR.

-Everything on your loan application form is subject to credit scoring. This includes where you live, how long you’ve been in your job, how long you’ve lived in the one premises and so on.

“Lenders know that certain suburbs and streets are high default areas,” says Daniels. “If you intend to buy in an area with high arrears, it will negatively impact your credit score.”

-If you leave any field blank on your application, it will hurt your chances. For example, you might have $300,000 in super, but forget to fill out that question, so you are given the worst possible rating for that field.

-You cannot appeal a bad credit score or a rejection. You have to wait six months until your record is clean.

Tip: You can find out your credit score by applying online for a copy through Veda at mycreditfile.com.au

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