Understanding Your Credit Score Before Applying for a Mortgage

Home Loans

8 Oct

When you’re thinking about applying for a home loan, one of the most important factors you’ll want to get familiar with is your credit score. Lenders use it as a key indicator of your creditworthiness. In simple terms, a stronger credit score can mean smoother approvals and better interest rates. Before you apply, you want to make sure your credit profile is in the best shape possible. In this article I’ll walk you through what a credit score is, why it matters for mortgages in Australia, and what you can do to improve yours.

What exactly is a credit score in Australia?

A credit score is a numerical summary of your credit history. In Australia, there are three main credit reporting bodies: Equifax, Experian and illion. Each uses slightly different scoring models. Equifax, for example, has a scale up to about 1,200, while others use 0 to 1,000. Because of these differences, your score can vary across the agencies.

Your credit report (which supports that score) contains all kinds of details: your history of loan repayments, credit card balances, any defaults or adverse listings, the number of recent credit applications, and more.

Why lenders care about your credit score

When you submit a home loan application, lenders are assessing risk. Your credit score helps them gauge how reliable you’ve been in managing debt in the past. A better score suggests lower risk, which in turn may influence:

Whether your loan is approved
The interest rate you are offered
The terms or features of the loan (e.g. flexibility, fees)
Whether you’ll be required to pay Lenders’ Mortgage Insurance (LMI) in tighter cases

Even though your credit score is important, lenders don’t look at it in isolation. They will also assess your income, employment history, existing debts, savings and how much deposit you are putting in.

What counts as a “good” credit score for a home loan

While there is no universal “cut-off,” generally lenders look for scores in the “Good” to “Very Good” range. Many sources suggest aiming for around 700 or higher to access more favourable terms. A score under 600 is still workable in some cases but is likely to come with tougher scrutiny or higher interest rates.

Specialist or non-conforming lenders may consider applications with lower scores, but they often impose stricter conditions.

It’s also worth noting that not all lenders rely purely on automated scoring. Some major banks still combine score models with manual assessment.

Key factors that influence your credit score

Here are the main elements that go into your score:

Payment history: whether you’ve made repayments on time. Missed or late payments negatively impact your score.
Credit utilisation / balances: how much of your available credit (credit cards, revolving lines) you’re using. Keeping utilisation low is beneficial.
Length of credit history: a longer track record gives lenders more confidence.
Types of credit: having different kinds (e.g. credit cards, loans) may help demonstrate your ability to manage various credit forms.
Credit enquiries: applying for new credit creates “hard enquiries,” which can temporarily reduce your score.
Adverse events: defaults, bankruptcies, judgments, or serious negative listings weigh heavily against your score.

Steps to check and improve your credit score before applying

Here are practical actions to take:

Obtain your credit reports from all agencies: You’re entitled to request a free credit report from Equifax, Experian or illion. Review each for errors, unknown accounts, or outdated listings. Dispute anything incorrect.
Ensure all repayments are on time: Late or missed payments hurt your score. Start prioritising due dates and set reminders or automations.
Reduce existing debts: Lower your balances, especially on credit cards or lines, to improve your utilisation ratio.
Avoid applying for new credit in the lead up to mortgage application: Each application is a potential “hard enquiry,” so hold off on taking on new cards or personal loans just before applying.
Maintain older accounts where possible: Closing long-standing accounts can shorten your credit history and may hurt your score.
Stabilise your financial habits over time: Consistent repayment behaviour, maintaining a healthy balance of credit, and avoiding default events all contribute to gradual improvement.
Be transparent about any adverse events: If you’ve had a default, divorce, job loss or similar event, be ready to explain the circumstances. Some lenders will accept well-argued reasons and recent evidence of improved behaviour.

What happens if your credit score isn’t perfect?

Don’t assume you’re ruled out if your score is less than ideal. Many borrowers fall into the “average” category yet still secure mortgages. In those cases:

You may pay a higher interest rate
Loan terms might be less flexible
Lenders could require greater documentation
You might need a larger deposit to offset risk
You may be steered toward specialist or non-conforming lenders

Because every lender has different credit policies, working with someone who understands those differences can help match you to a lender whose criteria you actually meet.

Conclusion

Understanding your credit score before applying for a mortgage is not just helpful, it’s essential. Knowing where you stand gives you time to catch errors, address weaknesses, and present yourself in the strongest light possible. While a good credit score opens more doors and better terms, even modest scores can still succeed with the right strategy and lender match. The key is to prepare in advance, build positive credit habits, and approach the application process with clarity.