The bad credit basket: Is this really where you belong?
If you’ve missed or defaulted a payment on a bill, credit card, personal loan or any other type of debt in the past, these can leave a bad mark in your credit file.
These past misdemeanours can result in ‘bad credit’ which can make it challenging to get a home loan – but there are still options to make your home loan dream a reality.
What lands you in the high credit risk basket?
Some common reasons that you’ll find yourself in the bad credit basket include:
- Past unpaid bills and loans, or missed payments
- Exceeding your credit card limit
- Credit file with ‘too many' credit checks
- Previously bankrupt
- A divorce leaving you in debt
- Registered credit defaults
- Part 9 or 10 Debt Agreement
- Temporary sickness without any payment during that period off work
How do you know if you have bad credit rating?
Unfortunately, most of the time you wouldn’t know – often it's not until you apply for a new loan that you find out about your credit rating. You can find you are suddenly labelled non-conforming because of what your file shows, such as previous credit defaults or multiple credit checks.
How can I improve my credit score in Australia?
There are steps you can take to help prove your creditworthiness to lenders. As well as paying your loans and credit cards on time, it could also be a good idea to get hold of your credit report and stop applying for new credit until you’re confident of your situation.
Our real life guide to your credit report provides more hints and tips on how to manage your credit history.
How does bad credit rating lead to a declined home loan application?
Having a bad credit rating can lead to your home loan application being declined as the risk is perceived to be too high to lend to a non-conforming borrower.
Another impact of having bad credit is that it may impact your ability to secure Lenders Mortgage Insurance (LMI) with a third-party insurer. This insurance protects the lender against the potential losses that may be incurred if you’re unable to repay your home loan and is generally mandatory for applications which have a deposit of less than 20% of the properties full value.
So not only do you have to pass the lender’s criteria, you also must meet the requirements from the insurers, which can be quite strict.
Finally, if you do manage to get approved, you are may be charged a higher interest rate than if you had a good credit score.
Do you need to wait until your credit history is cleared?
Not necessarily. If you’ve been previously declined for a home loan because of a few credit defaults, it doesn’t mean you have to wait to be in the clear before you can apply again.
Some specialist lenders, like us, offer a range of flexible home loan solutions to suit a variety of situations. As a specialist lender, we take a more holistic approach and look into both how the credit problems happened in the first place and consider your current circumstances, before making a decision.
We understand that sometimes circumstances beyond your control can lead to a missed payment, default or even bankruptcy. That’s why we’re here to help. We’ll talk with you one-on-one to understand your individual situation and work towards a solution.
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Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser.
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