Credit score and home loan approval: what lenders actually see

What a credit score actually is

Your credit report can include a credit score created by a credit reporting body from the information it holds about you. The Office of the Australian Information Commissioner describes that score as the body's analysis of your eligibility to be provided with consumer credit.

Read that carefully, because it says something people miss. The score is one company's opinion, produced from one company's data, and it is not the assessment a lender performs when you apply for a home loan.

There is more than one credit reporting body, and they do not all hold the same information about you. That is why two scores for the same person could differ, and why checking one body's file tells you about one body's file.

What is actually on your credit report

The categories of information that can appear on a consumer credit report are set by law rather than by the credit reporting bodies. Knowing the list is useful, because most of the worry people carry about their file is about things that are not on it.

• Identity details, including your current or last known address, your previous two addresses and your current or last known employer
• The credit providers that have given you consumer credit, the type of credit, when it started and ended, and the limit on it
• Repayment history information, showing whether payments were made on time or missed
• Financial hardship information, which is recorded against your repayment history
• Credit enquiries, meaning each time a provider requested your report in connection with an application
• Defaults of $150 or more where you are at least 60 days overdue, and a note if you later pay one
• Court judgments relating to credit, and information recorded on the National Personal Insolvency Index
• A credit provider's opinion that you have committed a serious credit infringement

Your income is not on it. A credit provider may ask for your income and use it to decide whether to lend to you, but it cannot give that figure to a credit reporting body to sit on your consumer credit report.

Buy now pay later arrangements can appear. They are treated as credit under the National Credit Code, which is also why a lender assessing your home loan will ask about accounts you may not think of as debt.

Repayment history, and the part most people do not know

Repayment history is the entry that does the most work on a home loan file, and it is the least understood. It appears as a number from 0 to 7, showing the age in months of your oldest missed payment.

A payment counts as missed once it is more than 14 days past its due date. That is the whole test, and it applies whether the amount was large or trivial.

Repayment history stays on your report for 2 years. Financial hardship information recorded against it stays for 1 year.

In practice this is the entry that separates two applicants who look identical on paper. A clean two years reads very differently to an assessor than a pattern of late payments, even where nothing was ever formally defaulted.

Defaults, and the rules before one can be listed

A default is a more serious entry than a late payment, and a credit provider cannot list one whenever it likes. There is a sequence it has to follow first.

1. 1

   The payment is at least 60 days overdue

   A default cannot be listed before that point, however unhappy the provider is about the account.

2. 2

   The overdue amount is $150 or more

   Below that figure the entry is not available to the provider at all.

3. 3

   A first notice is sent

   It goes to your last known address, tells you about the overdue payment and asks you to pay it.

4. 4

   A second notice follows at least 30 days later

   This one tells you that if you do not pay, the provider intends to disclose the information to a credit reporting body.

5. 5

   The provider waits at least 14 days

   Only after that period has run from the second notice can the default be listed.

6. 6

   And it cannot sit on it indefinitely

   A provider cannot wait more than 3 months after issuing the second notice to list the default.

Notices sent to your last known address count as sent, and they may be emailed where that is how the provider usually writes to you. If they went to an old address because you had not updated your details, the provider is likely to have met its obligations.

Paying a default afterwards does not remove it. The listing stays, and the provider updates it to show the amount was paid.

How long each entry stays on your file

Every category has a set lifespan. Nothing on this list is permanent, and nothing on it can be removed early because somebody paid a company to ask.

The practical use of that table is planning. A default listed three years ago behaves differently in a lender's policy to one listed three months ago, and knowing the date it drops off could change when it is worth applying.

Credit enquiries, and why shopping around badly costs you

When you apply for credit the provider requests your report, and that request is recorded on your file as a credit enquiry. It stays there for 5 years.

A provider does not need your consent to make that request. The obligation is to notify you that it will, which is what the privacy statement in an application form is doing.

This is why applying to several lenders to see who says yes is an expensive way to compare them. Each application leaves an enquiry behind, and a run of enquiries in a short window is a pattern a credit assessor reads badly.

How to get your credit report, free

You do not have to pay to see your own file, and you do not have to sign up to a subscription to get it. A credit reporting body must give you access to your consumer credit report free once every 3 months.

You can also request a free copy if you have been refused credit within the past 90 days, or if your credit-related personal information has been corrected. Outside those situations a body may charge a fee, but it must not be excessive.

• Request your report from each credit reporting body, because they hold different information about you
• Check your identity details first, including the addresses and employer recorded against you
• Read the repayment history line by line rather than glancing at the score
• Look for accounts you have closed that are still showing as open
• Look for enquiries you do not recognise, which could be the first sign of identity fraud
• Do it before you apply for anything, not after a lender has already read it

If something on your file is wrong

Credit reporting bodies must take reasonable steps to keep the information on your report accurate, up to date and complete. If something is wrong, you have a right to have it corrected and it costs nothing.

1. 1

   Get a copy of your report first

   You cannot dispute what you have not read, and the free copy is the starting point.

2. 2

   Contact the credit provider that listed it

   Depending on the type of information, going to the provider directly is usually the quickest way to get a correction made.

3. 3

   Or contact any credit reporting body

   It does not matter which door you knock on. If the one you contact cannot assist, it is required to consult the others to complete your request.

4. 4

   They have 30 days

   If satisfied the information is incorrect, they must take reasonable steps to correct it within 30 days, or a longer period you agree to, and write to you about it.

5. 5

   If they refuse, they must explain why

   They have to write to you with their reasons and tell you that you can take it to an external dispute resolution scheme or make a complaint.

6. 6

   Check it actually changed

   Request a fresh copy of your report and confirm the correction has been made rather than assuming it has.

Somebody can do this on your behalf under the access seeker provisions, with your written authority. Financial counsellors and community lawyers can assist, which matters if the listing relates to fraud, identity theft or family violence.

What to do if your file is not clean

A mark on your credit report is not automatically the end of a home loan application. Lenders differ in how they treat the same entry, and how they treat it commonly depends on what it was, how old it is and what has happened since.

What does not work is hoping an assessor will not notice. They will read the file, and an entry you did not mention reads far worse than the same entry explained up front.

• Pull your report from each body so you know exactly what is on it before anybody else does
• Write down the date each entry was listed, so you know when it drops off
• Keep the last two years of repayments clean, because that is the window repayment history covers
• Close credit accounts you no longer use, including buy now pay later arrangements
• Stop making applications while you sort the file out, since each one leaves an enquiry for 5 years
• Tell your broker about anything on the file at the start rather than after a lender has found it

Where we can help is in matching the file to a lender whose policy accommodates it, and in presenting it with the explanation already attached. Whether any lender approves remains that lender's decision and depends on your circumstances.

If you want the next step rather than more reading, /guides/home-loan-pre-approval/ covers what a pre-approval is worth and /guides/15-common-home-loan-application-mistakes/ covers the avoidable ways a file goes wrong.