Beware the seven deadly sins that may kill-off your ability to get a mortgage.
Two thirds of people have financial hangovers from mistakes made in the party years of their 20s, a survey of 250,000 people by GetCreditScore shows.
A total of 67 per cent of respondents indicated the financial mistakes of their younger years had an impact when they were older, including affecting their ability to get a mortgage.
Poor financial habits could restrict home buyers in getting their dream home, GetCreditScore spokesman Mitchel Harad said.
‘The big thing is to know your credit score. It should be the first step you take in the home buying process,’ Mr Harad said.
If your credit score is good it can give you bargaining power with the lender, but if it’s not then it there can be ramifications when applying for a home loan.
‘Your file isn’t created until you apply for credit the first time. Using it responsibly, [and] paying off the balance will establish a good credit history,’ he said. What lenders consider
Lenders will look at a home buyers’ full financial situation, from their savings and credit history to their current employment status, Mortgage Choice chief executive John Flavell said.
‘Sometimes young buyers will rack up significant debt and then fail to pay it off in a timely manner,’ Mr Flavell said.
‘A borrower who changes jobs on a frequent basis and can’t save at least part of their regular pay packet, will be considered ‘high risk’ by a lender. As such, they may have their application for finance declined,’ he said.
He recommended buyers make sure their finances are in order with a good, clean credit history.
‘For those who want to look like a serious potential borrower, it is important for them to try and limit the amount of credit card debt they have. Where possible, it is a good idea to pay down any debt as fast as possible,’ he said.
Having a credit card or debt won’t affect a credit history badly, but applying for many loans or credit cards in a short period of time can negatively affect a credit record.
Habits of Gen Y
The average Generation Y is saddled with $29,191 in debt, including car loans, personal loans and credit cards, Finder.com.au’s Bessie Hassan said.
‘If you were to apply for a home loan with that combined $29,191 debt – your borrowing power would be reduced by a staggering $119,000,’ Ms Hassan said.
She said sometimes people take out credit cards purely to begin a credit file.
‘In theory the practice stacks up – lenders like to see a healthy credit history before they will lend to you. But if you go over your limit or miss repayments you are just showing lenders that you can’t be trusted, which will hinder you.’
Cleaning up existing debts could be one way to make yourself more attractive to a lender, she said, and setting regular savings goals, reducing current accommodation costs and researching a credit card beforehand could also help.
‘Buying a first home is all about getting your ducks in a row, so following a simple checklist will get [you] off to a flying start,’ said ME head of home loans, Patrick Nolan.
‘Lenders will check your credit record as part of your home loan application – it shows how well you’ve managed money in the past so it’s worth taking a look at your credit record before your lender does,’ Mr Nolan said.
He recommended paying down other debts, such as car loans or personal loans, as well as reducing the maximum limits on credit cards.
Obtaining a conditional pre-approval before finding your ideal home can ensure you know how much you can spend and are aware of any issues beforehand.Seven credit mistakes
There are seven major mistakes Australians make with credit, according to GetCreditScore.
1) Using credit for insignificant purchases
While it may make sense at the time, buying that new outfit or paying for that upcoming Europe trip on your credit card will not do you any favours in the long run. Look to limit your credit purchases to absolute necessities or take out a loan with a low interest rate, ensuring you meet (and when possible, surpass) your minimum repayments as they fall due.
2) Applying for credit several times
When it comes to credit, the mantra ‘if at once you fail, try and try again’ does not apply. If you continue to apply for credit even after you were refused it from a credit provider, these enquiries will significantly reduce your credit score.
3) Failing to pay bills on time
Not only does this increase the amount you will end up paying overall, but overdue accounts are kept on your file for up to five years.
4) Not paying bills
If you fail to make your payments and ignore requests from your utility or loan provider, you could risk having these become listed as a default. Defaults are kept on your file for up to seven years.
5) Not keeping track of your credit report and credit score
‘Out of sight, out of mind’ isn’t necessarily a good thing in the world of credit management. Developing a proactive approach to your credit report will significantly improve your credit score in the long term.
6) Closing credit accounts
This is one mistake that is not commonly known. If your first thought after paying that last credit card statement is to close your account, hold on just a minute. Closing your account will actually lower your available credit and increase the debt-to-credit ratio on any other outstanding debts.
7) Sharing your credit card information
It is important not to share your credit information with others. Scam artists have creative tactics for retrieving your information, and one legitimate-sounding phone call or email could be detrimental.