Weekly Finance Update – Credit Scoring
Welcome to the finance update for the week ending 18 March, 2023.
Figures released last week showed that Australian homebuyers continued to demonstrate their confidence and trust in mortgage brokers, particularly in the current environment of rising interest rates and cost-of-living pressures, with close to 70% of all home loans for the December quarter. The Royal Commission several years ago sought to undermine the broker industry, but has in fact had the opposite affect with our obligation to act in the best interest of clients – an obligation lenders themselves do not have – building trust in the service we offer.
In this week’s newsletter, we look credit scoring which is an integral consideration when applying for a mortgage.
What is it?
A credit score is a number that summarises the information held on your credit report to provide an indication on how likely you are to pay back the money you owe to a credit provider. This is known as your ‘credit worthiness’.
Your credit score is calculated by either the credit reporting body or by the credit provider that you have applied to, using a formula that evaluates how well or badly you pay your bills, how much debt you carry and how all of that stacks up against other borrowers. In effect, it tells you in a single number (typically between 0-1000, or sometimes 0-1200) what your credit report says about your management of existing credit.
How is it calculated?
Your credit score is calculated using a variety of factors relating to your credit history, which are all summarised in your credit report. This typically includes details about:
- Your repayment history for any loans or credit cards
- A summary of how much you have borrowed in the past
- An estimate of your ability to pay bills on time
- Any credit limits currently in place
- The number and frequency of credit applications you’ve made in the past
- Any bankruptcies, defaults or court judgments in your name
- How do I interpret a credit score?
Generally speaking, your credit score is graded with simple categories: Excellent, Very good, Good, Average and Below average.
The higher your category, or score, the less risky you are considered to be as a borrower, and the more likely it is that you will be given a loan on better terms than otherwise.
A low score could mean that you will get a less favourable rate, or possibly even have loan applications rejected.
Any changes in interest rates from last week are highlighted in orange.
Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.