Whilst the exact formula for each lender is closely guarded (even spy like, with rumours that only 2 people in the bank only know the details and must never travel together), there are some basic fundamentals that every investor should be wary of with their own credit worthiness. Being aware means you have the power to either maintain what you have, or improve your situation.
Firstly it is important to understand that with any application for finance, lenders require a credit check or credit report to be obtained. If you’re not familiar with credit reports, it is a report prepared by a credit agency providing information on the credit history of an individual. Lenders use these as a prime tool to determine the credit suitability of an applicant.
Your report contains identifying information, credit accounts and loans, bankruptcies, late payments, and recent inquiries. If you have applied for a credit card or received monthly phone or electricity bills during the past 5 years, a credit-reporting agency will have a report in your name. You would have to give permission to do this as no one can perform this check without your go ahead.
With the new privacy laws introduced in March 2014, there has been enhancements to the system which includes more data and also presents it differently as now a score is given. For example, Veda credit scoring system is shown as a percentile between 1 - 1200, with a ‘good score’ ranging between the 41% - 60% percentile.
Generally, credit reports are given free of charge and you can get them once a year if you are happy to wait for a week or so in the mail. For a small charge it will be emailed to you within 24 hours. Though the value of being able to check and manage your credit report is important as what is on that report can prevent you from getting a loan or forcing you to look at specialist lenders who charge you a higher interest.
There are two main credit reporting agencies in Australia which can provide your report. They are Veda Advantage, and Dun & Bradstreet. Most lenders will use Veda.
Veda has a credit alert membership and any time your credit file is accessed you will be notified. This is a very useful tool for all consumers as it will alert you immediately if anyone has stolen your identity. It also helps track what lenders are putting on your credit file.
Further to the credit report, a lender will review all areas of your life, and evaluate or ‘score’ your application based on their perceived risk. Each lender has their own way of applying this, and this helps them target the types of clients they are willing to take the risk on. We’ll look at that in part two.
Michelle Coleman is a first-rate mortgage strategist and mum, and she heads up the team at W Financial. She is without a doubt, a legend of the Australian mortgage broking industry, having achieved over $500M of settlements in her 12+ year career to date, and won numerous industry awards, including #3 MPA Top Broker. Michelle is also a highly experienced property investor. www.wfinancial.com.au
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.