You decide to apply for a mortgage – maybe because you want to move to a suburb with better schools or buy a bigger house to accommodate your growing family. However, I’ve seen many times how things can go wrong, because some property investors have weaker credit positions than they believe.
Before I explain the problem, let me quickly explain how our credit system works.
Any time you take out credit – such as a home loan, a credit card or a phone plan – your behaviour is recorded.
Making payments on time and paying off loans reflect positively on your credit rating (a score that reflects your ability to manage loans), while falling behind on payments and defaulting on loans reflect negatively.
Applying for multiple loans in a short period of time may also lower your credit rating, as this might be regarded as irresponsible behaviour.
Sometimes, life happens, and we might miss a couple of rent payments. But if we eventually catch up, where’s the harm?
Or we might change address and never receive our final power bill. But that’s the electricity company’s problem, not ours, right?
Or we might need a personal loan in a hurry, and so, to speed up the process, we apply to five different lenders at once. But if we only follow through on one, who cares?
Unfortunately, all three scenarios might lower your credit rating, because they might suggest you’re not good at managing loans.
Do you know what else can affect your credit rating? Mistakes.
You might be shocked to learn that banks, telcos and utilities aren’t perfect.
Someone else’s default might accidentally be listed against your name. Or, you might repay a loan, but, for whatever reason, that good behaviour might not get recorded.
That’s why you should order a copy of your credit report from Equifax, Experian or Illion. Legally, you’re entitled to one free report per year.
When you get your report, check for negative listings.
Incorrect listings can be removed. Contact the credit provider that made the mistake and plead your case. It’s a complicated, tedious process, but don’t give up!
Accurate listings can’t be removed. But once you discover you have a low credit rating, you can work to fix it by doing things like paying your bills on time, repaying loans and closing your credit card.
When you have a higher credit rating, you’re more likely to be approved for that home loan, and more likely to receive lower interest rates.