Category: Credit Scores

Australia’s property market is hot right now, with lots of people flocking to the real estate market. But can you buy a house without a credit score? Tippla has provided you with everything you need to know below.

Buying a house in Australia

Many Australians are currently entering the property market, either to buy their first home, a new home or investment property. With household savings peaking during COVID-19, and the Australian Government providing a range of stimulus packages for the property market, many Aussies feel like now is the time to buy.

When you’re looking to buy a house, many people need to do so with the help of a mortgage – a loan that is provided by the bank or a similar financial institution. According to the Australia Bureau of Statistics (ABS), as of October 2020, the average mortgage in Australia was $453,133.

Unsurprisingly, residents of New South Wales on average have the largest mortgages on average. Following NSW is Victoria and then South Australia. 

Where can you apply for a mortgage?

You might be surprised to learn that it’s not just banks that offer home loans. In Australia, there are three main types of financial institutions where you can apply for a mortgage. The first of these three, is, of course, banks. 

However, you can also apply for a home loan with mutuals, otherwise known as “member-owned” lenders. These range from building societies, credit unions and member-owned banks.

Furthermore, you can also apply for mortgages with non-bank lenders, which are privately owned institutions. This type of lender is neither a bank nor mutuals, as they don’t hold a banking licence.

What do lenders consider when you apply for a mortgage?

When applying for a mortgage, financial institutions will take a number of factors into consideration. This includes your credit score, salary, length of employment, spending habits and more.

Here are some of the most common home loan requirements:

1. Credit score (the higher the better);
2. Deposit (at least 5%);
3. A stable income;
4. Personal ID, such as Driver’s Licence, Passport and similar documents;
5. Stable financial position;
6. Bank statements and payslips.

All of these factors and more give the institution you’re applying to a good overview of your financial situation. It allows them to judge how risky of a borrower you are, and make their decision accordingly.

Why do you need a credit score for buying a house?

Your credit score is a numerical representation of your creditworthiness, AKA, how reliable of a borrower you are. Typically, if you have a high credit score, then you are perceived to be less of a risk. Therefore, you’re more likely to be approved for finance.

Your credit score is based on your credit report. Your credit report provides an overview of your credit history. It allows lenders to see how responsible you have been with your debt.

Because of this, not having a credit score and credit report could be viewed as a red flag by lenders. It gives them one less measurement to determine how big of a risk you are. 

As a result, you might be charged a higher interest rate, which can cost you in the long run, or your application could be rejected. Having a good credit score could improve your chances of being approved for a mortgage.

How to buy a house without a credit score

Whilst having a credit score, especially a good credit score, can help your home loan application, you can still get a mortgage without a credit score. There are a number of things you can do to overcome this obstacle. 

However, it is worth pointing out that if you are applying for a mortgage without a credit score, you might have access to fewer loan options, only be offered loans with higher interest rates, and less desirable conditions. Furthermore, because of responsible lending standards, you might only be able to apply for a smaller loan amount.

Prove you’re in a strong financial position

One of the main focuses for lenders is checking whether potential borrowers are in a strong financial position. If you can prove that you’re in a strong financial position, then this could go a long way in helping your application.

So how can you do this? If you can show that you have a full-time stable job, a strong income, you can save money on a monthly basis, and show that you don’t have a history of dishonour fees and defaults, then these can all help your case.

Nonetheless, it is important to keep in mind that if you don’t have a credit score, then you’re starting at a disadvantage.

Here is a quick overview of some of the potential downsides of buying a house without a credit score:

• Limited choices of lenders;
• Higher interest rates;
• Smaller borrowing limit;
• Stricter loan terms and conditions.

How to build a credit history from scratch

If you’re thinking about buying a house but you don’t have a credit score, you could consider trying to build a credit history before applying for a mortgage. We’ve put together a few tips on how to build a credit history from scratch.

Open an Australian bank account

If you don’t already have your own bank account, then this could be a good place to start. Having a bank account could help you apply for credit later on. So whilst opening a bank account won’t immediately help you create a credit history, it is a good first step.

Bank accounts are also important when applying for finance. This allows lenders to see your spending habits and how you manage your money. If you are responsible with your spending, then this could go a long way for your application.

Add your name to your utilities

If you are living out of home and your name isn’t on your utility bills, it might be time to change that. Your utility bills are a form of credit. If your name is on the bill, then each payment you make on your bill goes towards building your credit score.

Apply for a credit card

One way you can build your credit history is by applying for a credit card. If you don’t have a credit history, your choices are more limited than if you did have a credit score. Nonetheless, there are options, as banks and financial institutions will take other factors into account.

If you are a tertiary student studying at either university, TAFE, VET or an apprenticeship, then you could be eligible for a student credit card without a credit history. However, it’s a good idea to compare your options beforehand.

If you’re not a student, there are still other options. You could, for instance, apply for a secured credit card. Similar to a secured personal loan, a secured credit card is when you have a cash deposit in your bank account that is the same amount as your credit limit. That way, it is guaranteed to be paid.

Proactively provide information to credit bureaus

If you don’t have any credit, then credit bureaus won’t have any information on you. One way you can overcome this is by reaching out to provide your information. This could be in the form of sending a document to prove your identity and address. However, it’s important to update your information when necessary – such as your address, so that you don’t end up with multiple files with different credit information.

Can I buy a house without a credit score?

To sum it all up, simply put, whilst you can buy a house without a credit score, it’s not necessarily your best option. If you don’t have a credit score, you might have access to fewer loan options. Not only that but the loans that you are offered might not be as good, as you are deemed a riskier borrower. This could mean higher interest rates, lower borrowing limit, and other fees.

With Buy Now Pay Later (BNPL) platforms, especially Afterpay, becoming an increasingly popular payment option, we’re exploring the potential negative effects of Afterpay and answering the question “is Afterpay bad for my credit score?”. Find out the answer below. 

What is Buy Now Pay Later?

As the name suggests, BNPL platforms allow customers to buy an item now and pay it off later, typically in fortnightly instalments. These type of platforms are useful for people who want to make a big purchase but they might not be able to afford the full amount upfront. It gives them the opportunity to space out the cost over multiple pay periods.

BNPL platforms are similar to the layby system used by many retail stores. However, the difference with BNPL platforms is that they generally pay the retailer for the goods upfront, so the customer can receive them instantly, and then the customer pays the BNPL platform back.

Some of the most common BNPL platforms are Afterpay, Klarna, Zip Co (Zip Pay and Zip Money), Splitit, Sezzle and more.

Buy Now Pay Later in Australia

BNPL platforms have really taken off in Australia, with Afterpay at the forefront of the movement. According to a recent report released by the Australian Securities and Investments Commission (ASIC), the total amount of credit extended under BNPL arrangements almost doubled from the 2017–18 financial year to the 2018–19 financial year.

Specifically, the November 2020 report outlined that as of June 2019, there were more than 6.1 million open BNPL accounts. This represents up to 30% of the Australian adult population.

Not only are a range of new competitors entering into the Australian landscape, but established licensed credit providers have started to offer a BNPL arrangement or alternative. This includes some of the largest banks in Australia – Commonwealth Bank of Australia, National Australia Bank (NAB) and Citigroup.

How does Buy Now Pay Later work?

Say you want a dress for $400, an example of using a BNPL platform is you’d only have to make an initial payment of $100, and over the next 6 weeks, each fortnight you would need to make another payment of $100 until the whole amount has been paid off. 

Many retailers now offer Afterpay, or similar BNPL platforms as a method of payment, as an alternative to paying with cash, debit or credit. Typically, all you need is an account via the app or website to make a transaction. This will be connected to a card or bank account, and the payments are commonly deducted automatically. You can also set up an account when you’re at the retailer, and once you’ve provided all your details, you will often get approval within seconds.

BNPL are similar to a loan, although they generally don’t come with interest, however, there can be fees associated with this kind of payment method, including late fees, overdraft fees from your bank, and interest if your account is connected to a credit card. 

What is Afterpay?

Afterpay is a company established here in Australia in 2015, which operates in Australia, Canada, the United Kingdom, the United States and New Zealand. It is one of the leading Buy Now Pay Later (BNPL) platforms, allowing shoppers to pay for items in instalments, instead of having to pay the full amount upfront.

What are the risks of Afterpay and BNPL?

Afterpay allows you to make interest-free instalment payments for your purchases. According to its website, you’ll only incur fees if your payments are late. Another perk of Afterpay is an “instant approval decision”, where you’re notified whether you’re approved within seconds. 

Whilst this all sounds great, are there risks associated with Afterpay? The simple answer is yes, so let’s take a closer look.

1. Afterpay can encourage impulse spending

Afterpay can be a great tool that allows customers to make larger purchases and break down the payments into more affordable instalments. However, one of the downsides of Afterpay and similar BNPL platforms, is that it can encourage impulse spending.

In fact, BNPL arrangements can actually make us spend more. Mel Browne, Author and Financial Wellness Advocate outlined the dangers of using Afterpay and similar services. As she outlined, the process of using cash causes the insular cortex of our brain to light up and it registers as pain. Credit cards and BNPL services don’t have this same effect, so we’re more likely to spend more.

Specifically, Browne argues that although there are dangers with credit cards, the risks are even greater with BNPL. She explains it like this: say you make a purchase of $100. This will be spread over 4 payments of $25. Your brain is likely to process this as only $25 – not $100. 

Therefore, your brain registers less pain, and you’ll likely end up spending more. This could then lead to you overspending and struggling to make your repayments.

2. Late payment fees

Whilst Afterpay doesn’t charge interest, there are late fees, which can end up costing you. As highlighted above, because of the psychology behind BNPL, you’re more likely to overspend and struggle to make your repayments. Therefore, there is a real risk of incurring late fees.

This was highlighted in ASIC’s report, which showed that 21% of BNPL users who were surveyed missed a payment in the last 12 months. For the 2018-2019, financial year missed payment fee revenue for the BNPL providers in the review exceeded $43 million. This was up by 38% from the previous year.

“One in five consumers surveyed told us that in the last 12 months they had missed or were late paying other bills in order to make their buy now pay later payments on time,” ASIC said in its report. “These consumers missed paying things such as household bills (44%), credit card payments (32%), and home mortgage payments (22%).”

3. You can’t choose your payment schedule

Another downside of Afterpay and other BNPL platforms is that you typically can’t choose when your payments come out. This can increase your risk of overdraft, and incurring late fees from your bank.

4. It can harm your chances of being accepted for a loan

Lending requirements have become a lot more strict in recent years in Australia. Because of this, anecdotes have surfaced of people being rejected for home loans and other types of finance because they had Afterpay or they spent too much money on Uber Eats.

When it comes to Afterpay, lenders still look at this as a line of credit, because you’re borrowing money that you don’t have. If you rely on Afterpay for a lot of expenses, then this indicates to lenders that you’re not responsible with your finances. 

Even if you don’t rely on Afterpay that much, lenders will still take a look at your BNPL spending habits, along with your other debts, to deem how risky of a borrower you are.

How does Afterpay affect my credit score?

Let’s get stuck into the next question – does Afterpay affect your credit score? Here’s what Afterpay has to say about it:

“Afterpay does not affect your credit score or credit rating. Your credit score can be impacted when somebody does a credit check on you or if you are reported as paying debts late; at Afterpay, we never do credit checks or report late payments.”

However, it is worth highlighting, that Afterpay’s Terms & Conditions do give it the authority to perform credit checks and also allow it to report “any negative activity on your Afterpay Account (including late payments, missed payments, defaults or chargebacks) to credit reporting agencies”.

So what does this mean? Basically, Afterpay doesn’t typically report your late payments or perform credit checks, but that doesn’t mean it won’t. That’s something to keep in mind when considering whether to start using Afterpay.

Other BNPL platforms, like Klarana, do perform a credit check when you use its services. Other platforms, like Zip, humm, Openpay and Payright all say they might perform a credit check, or that they reserve the right to perform a credit check, depending on the platform.

There’s a lot of uncertainty when it comes to credit scores. There’s one question, in particular, that has a lot of mystery surrounding it – how are credit scores calculated in Australia? We’re here to pull back the curtain and give you all the information you need.

Credit scores in Australia

Before diving into how your credit scores are calculated, you must understand what your credit score is. In Australia, three credit bureaus calculate your credit score – Equifax, Experian and illion. Your credit score sits somewhere on a scale ranging from 0 to 1,200. The higher your score, the better.

Your credit score is a number that represents how trustworthy of a borrower you are – i.e. how likely you are to make your repayments if you take on some kind of credit. There are many things that constitute as credit. 

Examples of credit

The following are examples of different types of credit in Australia:

• Credit card;
• Loans – personal loans (secured and unsecured), car loans, home loans (mortgage), business loans, student loans and more;
• Buy Now Pay Later services;
• Mobile phone;
• Internet;
• Electricity or gas;
• Water.

Your credit score is based on many factors. These include your credit history – do you always make your repayments on time, have you applied for credit recently, and if so, how many applications did you make? Other factors include more serious credit infringements – have you gone through bankruptcy, have you entered into default?

What is a good credit score?

Your credit score generally falls on a five-point scale – below average, average, good, very good and excellent. The higher your credit rating, the better it is. Not only does having a good credit score feel nice, but it could also unlock many financial benefits for you. 

These include lower interest rates when you take on some kind of credit, a larger variety of credit options, and better terms. All of these benefits could save you money, and all it takes is a good, or even excellent credit score.

So what is a good credit score? A good credit score differs between each of the bureaus. Here’s how Experian and Equifax categorise credit scores in Australia.

Source: Equifax and Experian

Understanding the difference between your credit score and credit report

What is the difference between your credit score and credit report? Simply put – your credit score is a number, ranging from 1 to 4 digits. This number gives lenders and credit providers insight into how reliable of a borrower you are. 

Your credit report is also referred to as a credit file, however, is what determines your credit score. Your credit report contains detailed information on your credit history. It outlines your credit accounts, credit enquiries (otherwise referred to as credit applications), defaults, judgements and details your credit history. 

If the information contained within your credit report demonstrates good credit behaviour, then you’re likely to have a credit score falling somewhere between good to excellent. If your credit report shows too many credit applications, defaults and serious credit infringements, then you’re likely to have a score ranging from below average to average.

Here’s an overview of what goes on your credit report and how long it stays there:

How does Equifax calculate my credit score?

Credit bureaus like to keep the exact algorithm they use to calculate your credit score close to their chest. Nonetheless, they have revealed certain information about how they calculate your credit score.

According to Equifax, the general factors considered in credit score calculations are as follows: 

• The number of accounts you have;
• The types of accounts;
• The length of your credit history;
• Your payment history.

Equifax has also outlined the below information as its standard Credit Score model used in its assessment. Of course, this is only a general overview and it is subject to change. Nonetheless, it provides a good picture of what the credit bureau deems as the most important.

How does Experian calculate my credit score?

Now you have a better understanding of how Equifax calculates your credit score, let’s take a look at how Experian calculates your credit score. As highlighted by the bureau itself: “Your Experian Credit Score is calculated applying a statistical algorithm that uses past events to predict future behaviour. Each credit bureau uses a slightly different algorithm and does not disclose in detail how this is calculated.”

Experian does go on to outline some key attributes that are used to generate your credit score. This includes:

• Type of credit providers that have made enquiries on your report;
• The type of credit you have applied for;
• Your repayment history;
• The credit limit of each other credit products;
• Negative entries;
• The number of credit enquiries (credit applications) you have made.

Whilst we don’t know how much each of these items weighs when it comes to calculating your score, you can assume that the above factors will have some influence on your rating. Therefore, if you want to have a good credit score or higher, then you could ensure that you employ positive credit behaviour regarding the above items.

How does illion calculate my credit score?

Last but not least, let’s take a look at how illion calculates your credit score. On its website, illion says that it determines your credit rating by looking at whether you’re reliable with paying your bills. 

Furthermore, the credit reporting agency also outlines that the following events could harm your credit score:

• Not paying your bills on time, or failing to pay them at all;
• Applying for credit too often;
• If someone else defaults on a joint debt.

With this in mind, we can assume that paying your bills on time and spacing out your credit applications could have a positive impact on your credit score.

Credit score calculator

Unfortunately, there’s no such thing as a credit score calculator. However, there are several ways you can check your credit rating. If you’re just wanting to know your credit score, then there are many free online sites you can use. Similar to Tippla, you can sign up in minutes, and you’ll usually need to provide some kind of identification, like your driver’s licence.

However, if you also want to see your credit report, where all the important information is, then some of the online sites won’t be able to help you. This is where Tippla can help! 

With Tippla, not only can you check your credit score, but you can also see your full credit report for both Equifax and Experian. This provides you with a more thorough overview of your credit situation. The sign-up process takes just minutes and it is completely free.

Alternatively, you can get your report directly from each of the credit bureaus. However, you will have to wait 10 days to get your report. If you want your credit report within 10 days, then you might have to pay for it. You might also incur a fee if you ask for a copy of your credit report more than once a year.

How to improve my credit score

There are many ways you can improve your credit score. We recently put together a helpful guide on how to improve your credit score. Here’s a breakdown:

Space out your credit applications

One way you can improve your credit score, or at least, limit the damage to your credit score, is by spacing out your credit applications. When you apply for any type of credit, the lender will look at your credit report. This registers as a hard enquiry on your report and harms your credit score for a time. 

The more applications you make in a short period, the more damage it will do. If you space out your credit applications, then you can limit the damage to your credit score. Not only that but multiple applications in quick succession can indicate to lenders and credit providers viewing your report that you are in financial distress. Regardless of whether this is the case or not, it could lead to you being rejected for a loan.

Make your repayments on time

As outlined by the three credit bureaus, your repayment history is factored into your credit score. For some, it is the most important ingredient. That’s why ensuring that you make your repayments on time is important if you want to have a good credit score.

Keep your credit accounts open

Whilst having too many lines of credit open can be bad for your credit score, it can also be good to keep your credit accounts open, even if you’re not using them. Confused? It does sound contradictory. Here’s how it works. 

The age of your credit account matters, and it can contribute positively to your credit score. The older the account, the better it is for your rating. That’s because it demonstrates that you can consistently handle a line of credit.

Check your credit report frequently

If you want to stay on top of your credit score, then it’s a good idea to check your credit report frequently. Your report can change often, sometimes even multiple times a day. You can never be too careful. 

If you become familiar with your report and score, then you can see if it drops or increases. Then you can take a look at your report and see what’s changed. This can give you a good insight into what’s good and bad for your score. 

Keep an eye out for mistakes on your credit report

1 in 5 credit reports will contain some kind of mistake on them. Not only can mistakes harm your credit score, but they could also be an indicator that you’ve been subject to credit card fraud. That’s why it’s important to check your report and score often.

How Are Credit Scores Calculated in Australia?

Unfortunately, there is no clear answer to the question “how are credit scores calculated in Australia”. This is because the credit bureaus won’t reveal their exact formula for calculating credit scores. Nonetheless, if you do these following things, then it could be the difference between having a good and bad credit score:

• Make your repayments on time;
• Pay your bills;
• Don’t make too many credit applications in a short period;
• Check your credit report frequently;
• Don’t take on too much credit.

Want to know more about your credit score? Head to Tippla’s blog where you can find many informative articles and guides on your credit score. If you want to view your free credit report, you can sign up to Tippla and have your credit score and report within minutes.