Expert offers guide on what lenders are looking for when reviewing an applicant's credit score
It’s the ten-thousand-dollar question, what credit score is required to get approved for a loan?
While I will do my best to answer this, it’s important to note that every credit provider has their own policies and tolerances with regard to the condition of an applicant’s credit file, so this isn’t a one size fits all question. Having said that, I can certainly give you a guide of what lenders are looking for when reviewing an applicant’s credit score and what is likely to lead to an approval or a decline. Obviously with securing finance there is more involved than just a good credit score however in most cases a borrower will not even make it to first base if their credit score is low.
Before I talk numbers let’s touch on the basics of what a credit score is. A credit score is a number that is displayed on the opening page of a credit report. This number is designed to show a credit provider the risk profile of an applicant. Other than a formal debt agreement such as a Part 9 or a bankruptcy, the lowest credit score a person can have is -200 and the highest is 1200. Along with the credit score, Equifax will even state the chances of a borrower defaulting on a loan over a 12-month period. For example, a score of 311 has a 32% chance of an adverse record in the next 12 months while a score of 726 only has a 3% chance. As you can imagine, very few credit providers will take on a borrower when they think they have anything close to a 32% chance of financial problems in the first 12 months of a loan.
A credit score can be impacted by several things such as a change of employment, credit applications and most of all, missed payments and payment defaults. Unfortunately, once a credit score falls below a certain level it can be next to impossible to secure finance, at least at good rates.
From a credit provider’s perspective, a credit score is a way of quickly assessing risk. Many larger lenders such as the banks have automated credit assessing processes and these are triggered to react to a credit score. While it may be an over-simplification, in many cases a credit score of X will result in an application moving forward where a score of Y will mean it’s automatically declined. In some cases, high volume credit providers such as the banks will use a credit score as a way of culling applications, if it’s low the answer is no.
Credit scores are colour coded with the colours moving from red (bad) to yellow (could be a problem) to green (good). The red range, being a low credit score, starts from -200 to around 350. Orange covers scores from 400 to 550 and green scores range from 650 to 1200. While these colours are only a guide it is fair to say that it would be best to have a credit score in the green of at least 650 and ideally 800 plus. This by no means guarantees credit will be approved but it’s a good start.
The good news is there are situations where negative credit listings such as defaults and court judgments can be removed from a credit file which will dramatically improve a credit score, however that’s another topic on its own.
The bottom line is a good credit score has never been more important as lenders are becoming more risk conscious and lending policies are getting tighter. Due to this I recommend everyone checks their credit score before applying for finance as no one likes nasty surprises.
John Dickinson
Debtx-X – Debt Mediation Services
www.debtx.com.au
