What is a credit score?
A credit score is a number that helps lenders assess how you've managed credit in the past. It's based on information in your credit report, including your repayment history, outstanding debts, credit applications and any defaults or other negative events.
Think of it as a snapshot of your borrowing history. While different credit reporting agencies use different scoring models, the principle is the same: a higher score generally indicates you've managed credit responsibly, while a lower score may suggest a higher lending risk.
It's important to understand that your credit score and credit report aren't the same thing.
Your credit report contains detailed information about your financial history, including:
- your current and previous credit accounts
- repayment history
- credit enquiries
- defaults and court judgments (if any)
- bankruptcy or serious credit infringements
Your credit score is a numerical summary of that information.
When you apply for a home loan, lenders don't make decisions based solely on your credit score. They also assess your income, employment, expenses, existing debts, deposit and overall ability to repay the loan. A strong credit score improves your chances, but it doesn't guarantee approval. Likewise, a lower score doesn't automatically mean your application will be declined.
What credit score do you need for a home loan?
One of the most common questions borrowers ask is, "What's the minimum credit score I need to get a home loan?"
The honest answer is that there isn't one.
Unlike some countries, Australian lenders don't publish a minimum credit score for mortgage approval. Every lender has its own credit policy, and your score is only one part of the assessment.
Generally, lenders look at your application as a whole, considering factors such as:
- your income and employment stability
- your existing debts
- your living expenses
- your deposit or available equity
- your loan-to-value ratio (LVR)
- your repayment history
- your credit score
As a general guide, credit scores are often grouped as follows:
A lower credit score doesn't automatically prevent you from getting a home loan. Some borrowers with lower scores are approved because they have a stable income, a larger deposit or a strong recent repayment history. Likewise, someone with an excellent credit score can still be declined if they don't meet the lender's serviceability or lending criteria.
The goal isn't necessarily to have a perfect credit score, it's to present a well-rounded application that demonstrates you can comfortably repay the loan.
How does your credit score affect your home loan?
Your credit score alone doesn't determine whether you'll get a home loan, but it does influence how lenders assess your application. Combined with your income, expenses, deposit and employment history, it helps lenders decide how much risk they're taking on.
Here's where your credit score can make a difference.
Home loan approval
Your credit score is one of several factors lenders consider when deciding whether to approve your application. A strong credit score demonstrates that you've managed credit responsibly over time, which can improve your chances of approval.
However, lenders don't approve or decline applications based on your credit score alone. They'll also assess your financial situation to understand whether you can repay the loan.
This means a borrower with an average credit score and a strong financial position may still be approved, while someone with an excellent credit score could be declined if they can't comfortably service the loan.
Interest rates
Many Australian lenders use risk-based pricing, meaning the level of risk you present can influence the interest rate you're offered.
Borrowers with stronger credit profiles may qualify for more competitive rates, while those with missed repayments, defaults or a poor credit history may receive fewer loan options or higher interest rates.
Even a small difference in your interest rate can have a significant impact over the life of your loan.
Borrowing capacity
Your borrowing capacity is primarily determined by your income, expenses and existing financial commitments. However, your credit score can also influence how much a lender is willing to lend.
If your credit history shows missed repayments or multiple recent credit applications, some lenders may reduce the amount they're prepared to lend or decline the application altogether.
On the other hand, a strong credit history gives lenders greater confidence in your ability to manage repayments.
Deposit and Lenders Mortgage Insurance (LMI)
Your credit score can also affect how much deposit you'll need.
Borrowers with a strong credit profile may have access to more lenders willing to approve higher loan-to-value ratios (LVRs). Those with weaker credit histories may find their lender options become more limited, particularly if they're borrowing more than 80% of the property's value.
Depending on the lender, this could mean:
- needing a larger deposit
- paying LMI
- facing additional lending conditions
- having fewer home loan products to choose from
Can you get a home loan with bad credit?
Yes. A low credit score doesn't automatically prevent you from getting a home loan but your options are likely to be limited.
Some mainstream lenders may decline applications with poor credit histories, while specialist lenders may still be prepared to lend under different conditions. This could include requiring a larger deposit, charging a higher interest rate or requesting additional supporting information.
It's also worth thinking why your credit score is poor in the first place. If you're having difficulty managing your finances, adding another loan to the mix can aggravate your problems. But if you've made mistakes in the past and have since improved your finances, there are lenders who may be willing to lend to you.
What affects your credit score?
Your credit score changes over time based on how you manage credit. Positive financial habits can improve your score, while missed repayments and excessive borrowing can lower it.
Does checking your credit score lower it?
No.
Checking your own credit score is considered a soft enquiry and doesn't affect your credit score.
Your credit score is only impacted when you submit a formal credit application, such as applying for a home loan, credit card or personal loan. This creates a hard enquiry, which may have a small, temporary impact on your score.
It's also worth avoiding multiple loan applications with different lenders over a short period, as several hard enquiries can make lenders think you're actively seeking credit.
If you're simply comparing home loans or checking your eligibility, your credit score won't be affected until you decide to formally apply.
How long do defaults stay on your credit report?
Negative information does not stay on your credit report forever. In Australia, different types of information remain on your credit file for different periods:
- Credit enquiries: 5 years
- Repayment history information: 2 years
- Payment defaults: 5 years
- Court judgments: 5 years
- Bankruptcy: 5 years, or longer in some circumstances
- Serious credit infringements: 7 years
How to improve your credit score before applying for a home loan
If you're planning to buy a home in the next six to twelve months, taking steps to improve your credit profile could increase your lender options and improve your chances of securing a competitive interest rate.
Before you apply:
- Check your credit report for any errors or outdated information.
- Pay all repayments on time, including credit cards, loans and utility bills.
- Reduce your credit card balances where possible.
- Avoid applying for multiple credit products in a short period.
- Pay down existing debts if you can.
- Keep older credit accounts in good standing, rather than closing them unnecessarily.
- Resolve any outstanding defaults or overdue accounts before submitting your application.
A perfect credit score isn't necessary to get a home loan. What lenders want to see is a consistent pattern of responsible financial behaviour and confidence that you'll be able to comfortably meet your repayments.
