Home loan rejected? Your credit score could be the reason
Category General News
With prime lending rates still relatively low and banks approving loans with attractive terms, getting a home loan remains accessible for potential buyers. If you're taking the leap into homeownership, getting your credit score in check is an important step to securing financing. Your score can unlock the door to your property, so get insight into its importance, how it works, and ways to improve your assessment.
What is a credit score?
A credit score is a three-digit number, often between 300 and 850 that forms part of your credit report. Your credit score, together with other information within your report, indicates how financially dependable you are when it comes to paying back debt. A low score shows you are a high-risk borrower while a high score shows you are a low-risk borrower and a safe bet to pay back money loaned.
While a good credit score will help you qualify for a home loan, there isn't a universal number that makes one. Credit scores vary from credit bureau to bureau, and even lenders and banks have their own customised credit scores. The aim is to ensure you manage your finances carefully to avoid raising any red flags for lenders.
Importance of a good credit score
Your credit score is a reflection of the strengths and weaknesses of your credit report information. Financial institutions use it to understand if you will pay back loans fully and on time; the higher a credit score, the more confidence they will have in providing you with funding. Here are three ways a good credit score will benefit you when applying for a home loan:
- Increase your chances of a loan approval: While a high credit score isn't a guarantee you will receive a home loan, it is still a vital reason lenders factor into their decision.
- Receive lower interest rates: Your credit score has an impact on the cost you pay for borrowing money. With a good credit score, you will receive more favourable interest rates, meaning you will pay lower finance charges. This can help you pay off your home loan quickly and effortlessly.
- Get approved for higher limits: Together with your income, your credit score influences the home loan amount you can qualify for. This can give you access to a greater range of real estate on the property hunt.
If you do plan on using a home loan, you will need to build a positive credit history to gain a good credit score.
How is your credit score calculated?
Credit bureaus evaluate your credit score based on your debt payment history, the amount of credit you've used, the length of your credit history, and the different types of credit you've used. They will check to see if you have any defaults in your name, how many recent credit accounts you've applied for and opened, and how many credit enquiries have been requested in your name in the last 12 months.
You can check your credit score by requesting a credit report from credit bureaus such as TransUnion, Experian, XDS, and Compuscan, or through your bank. Thanks to the National Credit Act, you are entitled to one free credit report from each credit bureau each year in order to effectively manage your credit profile.
Tips to improve your credit score
One of your most valuable assets is a healthy credit rating. And while there are no quick fixes, there's still much you can do to nurture your credit score. A bad/poor credit rating can be improved to help you get credit in the future and at the best rates possible.
- Live within your means and spend responsibly. You should use credit for large essentials rather than covering basic living expenses. Create a budget and stick to it.
- Pay your debt on time - it's not just about paying off debt but paying it consistently within the required time period.
- Check your free credit report to understand your credit history, update your details, and ensure there are no mistakes. You can use the report to dispute any inaccuracies that are lowering your score.
- Pay off what you owe, prioritising the debts with the highest interest rates first. Rather than moving debt around, it pays to consolidate your debt into a single loan that's simpler to manage.
- Inform your creditors if you have payment issues. You can create payment plans and get debt counselling to help you get back on track. Standard Bank, for example, offers clients a Debt Care Centre that assists with a comprehensive financial plan, payment holidays, consolidation loans, and loan restructuring.
- Have a diverse range of credit in your name such as store accounts, credit cards, and service contracts (e.g. for your cell phone) to create a strong credit history.
- Apply for new lines of credit within reason. Frequent credit checks can lower your score. Plus, the additional credit can be a warning sign for other lenders that you may battle to pay off their loan at a later stage. Only apply for as much credit as you need.
- Don't close too many of your accounts as they will still reflect as part of your credit history. When you remove an account, you're reducing your proof of creditworthiness as lenders will only have your remaining accounts to reference.
Get your credit score in order
Your future home is around the corner. By applying for your free credit report and building a positive credit history, you can reach your homeowner aspirations. For help on the property search, view our property listings and give us a shout today.
Author: Kellaprince Properties