A bad credit score can stand in your way when you want to get a mortgage, take out a personal loan or even buy a new car. Lenders use your credit rating to assess the risk involved in lending you money. They also reserve their best interest rates and deals for borrowers with a high credit score. On the other hand, bad credit on your file can make it difficult for you to get approved for finance, or you might be offered a loan at a higher interest rate than the market average.
What Leads to Bad Credit?
Perhaps it’ll come as a surprise, but it’s not just people with financial difficulties that have poor credit on their files. Many reasons can lead to your credit score being lower than you would like. A simple mistake like forgetting to pay your utility bills while you’re away on vacation can also be recorded on your credit report and negatively impact your credit score. Various other factors, like outstanding debts, credit card limits, and even the length of your credit history can impact your score.
The good thing is your credit score is a dynamic number, and making positive changes in your lifestyle can help improve it over time. Under the Comprehensive Credit Reporting guidelines, your credit report now also includes positive information like your repayment history. So, if you’re regularly paying your bills and taking steps to manage your debt better, it’s likely to have a positive impact on your credit.
Top Tips for Borrowers With Bad Credit
Getting approved for a home loan with bad credit can be challenging, but not impossible. Here are some tips to maximise your chances of mortgage approval with bad credit on your file.
1. Avoid Lenders Mortgage Insurance (LMI)
Most lenders require you to provide a 20 per cent deposit to be eligible for a home loan. While you can still borrow with a lesser deposit, you’ll have to pay for LMI, which protects the lender’s interests if you default on the loan. It also means you’ll require two approvals for your mortgage – one from the lender and the other from the mortgage insurer. By having adequate funds to cover your deposit and additional costs like stamp duty, you can avoid having your application assessed by an insurer, and potentially increase your chances of mortgage approval.
2. Seek Expert Help
If you’re applying for a home loan with bad credit, it might be a good idea to speak with a mortgage broker to understand the various financing options available to you.
Mortgage brokers are required by law to act in your best interests. They also have experience working with a wide range of borrowers and lenders to gauge the likelihood of your application being approved by specific lenders.
For instance, many lenders use an automated credit scoring system to evaluate your home loan application. If there’s bad credit on your file, the software is likely to rate your application poorly. Based on this score, your application may be automatically declined without even passing through a real person.
Generally, a broker is aware of these things and will help you apply with a lender that doesn’t use a credit scoring system to assess your application. This will help ensure that your application is evaluated by a real person. Your broker can also help the lender understand the reason for your past financial problems and what steps you’ve taken to get your finances back on track, which might improve your chances of approval.
3. Demonstrate Good Financial Behaviour
If you’ve had credit problems in the past, it’s time to demonstrate better financial behaviour by taking control of your expenditure and ensuring all your bills are paid on time. This includes your credit card bills, rent and utility payments, and any personal or other loans you might have taken out, be it for any purpose.
It’s also worth checking your credit report and making sure that the information listed on it is correct. If not, it’s advisable to contact the credit reporting body and ask them to fix the issue by removing the incorrect listing.
4. Apply to a Specialist Lender
Depending upon your credit history, you may not be eligible for financing from some mainstream lenders. However, you may still be able to apply for a bad credit home loan offered by specialist lenders. The only downside is that you’ll be charged a higher interest rate on a bad credit mortgage. Also, if you’ve had financial troubles in the past, it’s essential to think carefully and practically as to whether you can realistically afford a home loan or not. If you struggle to make the repayments on your bad credit mortgage, your credit score could suffer further. In the worst case scenario your house could be repossessed if you default on your home loan. Conversely, if you continue making your repayments promptly, you have a good chance of improving your credit situation and refinancing to a lower rate in the future.