Ep13: What is a credit score and how will it affect my home loan eligibility?

Don't be dumb and naive about this stuff.

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Think about it.

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If you need to list all the different loan products you currently have, the answer is you're a time bomb waiting to happen in the bank's eyes.

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Welcome to the Home Loan Insider.

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I'm Max Lending, your industry insider, and we're lifting the lid on the finance market, guiding you on how to cut through the jargon, manage your finances, and get investing into the property market.

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Welcome back, people.

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In today's topic we're going to be talking about something super sexy.

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It's so sexy that you might even take all your clothes off.

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It's credit scoring.

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Oh yeah.

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What was that one more time?

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Credit scoring.

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I'm getting all hot and bothered in here.

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No.

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Yes, it's not as exciting, but it is super important and you need to know it.

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So you know the drill.

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Get into your comfy undies, get that cup of coffee, and let's get stuck into it.

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I'm going to clear something up first.

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In Australia, credit scoring is extremely important, but it's nothing like in America.

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Those yanks take it to a whole new level.

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People over there, they'll actually walk around knowing what their credit score is better than what they know their phone number.

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That's because in America, they'll actually give you a different interest rate based on your credit score.

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Here, very few companies will do that.

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Actually, it's a major red flag if you're dealing with a company that is giving you a personalized interest rate based on your credit score.

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If you ever play around with those guys in the sandpit, you need to take a good hard look at yourself and figure out what the hell am I doing and run, run, run, run, run.

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Now, because no one cares about what their credit score in Australia is, doesn't mean you shouldn't care.

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You should care.

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If you have a bad score, the banks just won't lend to you.

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It's no ifs, no buts.

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It's more like, get out of here, we're not touching you.

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Now let's go through the basics.

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What the hell is a credit score?

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In Australia, it's the summary of your credit information held by the reporting agencies.

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Your credit score will be numbered between 0 and 1200.

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What are those numbers represent?

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Who knows?

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Who cares?

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Simply, the higher your score, the better human being you are, and you're seen as a lower credit risk.

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No, noThat score is actually derived from a host of different factors.

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We'll go through them and we'll go through how they actually affect your score as well.

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What sort of things affect your credit score, you say?

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Well, it's basically anytime you apply for credit.

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Such as a credit card, personal loan, home loan, car loan, even a new phone contract, all those buy now, pay later applications you love so much, you guys.

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Afterpay, sid pay, all the other crap.

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Even if you don't proceed with the credit card application or any of those other applications, it will affect your score.

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The major factor that actually really moves the needle is the type of credit you're applying for.

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This is called your credit mix.

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If you load up on getting unsecured debt like a credit card or personal loan, then you look like a walking risk.

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Think about it.

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If you have one credit card, one personal loan, that's fine.

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But if you have three credit cards and three personal loans, you look like a problem waiting to happen.

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Be smart.

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Don't be dumb and naive about this stuff.

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Think about it.

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If you need to list all the different loan products you currently have, the answer is you're a time bomb waiting to happen in the bank's eyes.

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Missed payments is a huge issue.

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Don't sit there and say, oh Max, I was only late a few times.

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That I don't care attitude doesn't fly with the banks.

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You're not special.

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The bank does not care if they lend money to you or not.

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If you look risky, they'll drop you.

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Late payments are lodged if you were late by 30 days or more.

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Multiple late payments will smash your score down.

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They're listed as either like a 1234, et cetera.

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So let me explain this.

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If you're like three months late, then you'll have a late payment of three listed next to that facility because you've been 90 days or more.

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It will take two years for that to drop off, and it will follow you around like a stinky turd in a toddler's pants.

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Another major item that affects your score is hardship.

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If you call up the bank for hardship, you are stuffed.

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That reminds me of a good story, actually.

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I had a client that came to me because they were knocked back by a bank due to an auto decline.

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I'll go through what an auto decline is after this story.

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Basically what happened is they heard on TV, on like a current affair or something like that, that the banks had to offer hardship assistance if they called them up and stated that they were in hardship.

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They thought, hey.

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Let's be clever and we'll lie to the bank, as they were hoping the bank would put a payment pause on their loan.

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Really, what they wanted to do was go on holiday and not have to make mortgage repayments.

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Thinking that this was the best idea ever, they would use the amount of money that they'd normally spend on their repayment and instead use it for the holiday.

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They weren't in hardship at all.

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It was pure just lying to the bank.

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Anyway, so the bank did just that.

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They put a payment pause for their repayments for three months.

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Cut forward a year now.

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And they want to increase their loan and do some renos on their house.

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Guess what?

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The bank declined them because their credit score was shot.

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It was listed on there that they had applied for hardship.

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They thought, oh, well, we'll just go to another bank.

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The next two banks proceeded to auto decline the application because they had hardship listed on the credit file.

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No reputable bank would lend to them for another two years until that hardship dropped off.

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They were stuck.

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Just remember.

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You're not smart when you think that you've come up with some harebrained scheme to arbitrage the system.

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These guys were the dumbest people in the room.

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They just didn't realise it.

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Hey guys, sorry to interrupt your regular listening.

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We're just going on a small intermission.

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If you're enjoying today's episode, we have many more just like it.

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I'd recommend listening to episode 9 on how to create a budget or our most popular episode so far, Episode 7, titled Ask Max, How patience and paying.

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Enough debt can increase your borrowing capacity.

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That's intermission over.

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Now back to the show.

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OK, so as promised, let's go through what is an auto decline.

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It's when the bank's algorithm will automatically decline your application and no one in the bank is allowed to tell you why, and you don't get a second chance or option to have the decline decision reviewed.

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The reason for this is because if they told everybody why your order declined, then people will start to figure out the algorithm and start to game the system.

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Just remember guys, they don't call me the home loan insider for no reason who asks giving you these juicy tips.

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Do you want to know what's inside the algorithm?

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I can't tell you.

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No, no, I shouldn't.

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All right, 'cause you asked nicely all the banks that order decline, basically they have the same criteria.

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Here it is.

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If you have a score under 600, auto decline.

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If you have hardship listed, auto decline.

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If you have applied for 15 or more credit facilities in the last five years, even if you did not proceed with any, auto decline.

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If you have a default or a court judgement, auto decline.

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And if you've been declared bankrupt in the last eight years, guess what I'm going to say?

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Auto decline.

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This is not to say that you can't get a loan.

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It's just more that you can't get a loan at the banks that credit score.

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OK, so getting back on topic, other things that affect your credit score apart from late payments and declaring hardship.

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Another big no no is what's called credit chasing, which normally comes about not actually by people making late payments on their bills.

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It's more for the pursuit of frequent flyer points.

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And thinking that they're smarter than the rest of us by maxing out a credit card, then doing a balance transfer to another credit card where they'll receive points and that very tempting interest rate period for up to 12 months.

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At the end of that 12 month period, they then balance transfer again to another credit card, continuing the cycle.

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Well, guess what?

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The banks are not stupid.

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The minute they see this behaviour, they will refuse to lend to you.

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One individual I knew thought they'd come up with the world's best plan.

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They would Max out their credit card and buy $40,000 worth of appliances for their house.

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This was with one of those 12 month interest free latitude cards that big box furniture stores lure you in with.

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They did actually have 40K in cash at the time, but they thought they would invest that in the share market and earn a return for 12 month period.

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At the end of 12 months, the plan was that they would pay back the 40K credit card and they would have got to keep that sweet, sweet returns that they would made in the share market over that period.

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Oh, I forgot to mention, this genius was not a financial advisor in any way, shape or form, and they thought they could stock pick the winners for the next 12 months straight.

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Well, my friend, I think we all know where this went.

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At the end of the 12 months, he had turned 40K into 10K.

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And to add insult to injury, he didn't read the fine print of the latitude card that said if you didn't pay back the card within 12 months, you would be charged the full interest for the preceding 12 months.

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That will be automatically capitalised at 18%, which meant his $40,000 credit card bill was now a whopping forty-seven $1000.

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If I ever hear any of you guys doing something as dumb as that, I'm going to come to your house and beat you with a phone book.

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Now that you've heard the horror stories and have had the death threat, how do you go about cleaning up your credit history?

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Simple.

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Pay your loans on time.

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Get your credit mix under control.

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What do I mean by this?

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close all those buy now, pay later accounts that you have.

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You don't need them.

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They are seen as low level credit for low level people.

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close all those multiple credit cards you also have.

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One credit card facility is enough and stop applying for more credit.

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The good thing is time will heal all wounds.

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Be good for two years.

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And you'll see an increase in your credit score substantially.

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Now, if you'd like to know what your credit score is, you can do some Googling and there are a few firms out there that will allow you to check for free.

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Keep in mind though, that all reputable banks will use Equifax as their credit scoring agency, so it might be a good start to check with them, but it's not free.

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So only really use them if you're serious about looking to buy a home and you want to ensure that all your credit facilities are nice and clean prior to your loan submission.

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Thank you very much for listening this week, guys.

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Hopefully you still got your clothes on.

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Like I said, eh, it's a pretty sexy topic.

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It helps us get the podcast out there.

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And as always, you stay classy and I'll see you at the next one.

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Details available in the show notes.

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Any opinions and views expressed in this program are just that opinions.

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All information is general in nature and should not be seen as financial, economic, legal, investment, accounting or tax advice.

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This program makes no representation or warranty as to the accuracy or completeness of any information contained in this program.

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You should consult a professional advisor in relation to your own personal circumstances.