AusFinance Gazette

Why having a great credit score doesn’t matter

Sometimes okay and excellent can mean the same thing

These days, it’s impossible to escape the persistence of credit score ads. They chase you around your devices, calling out from TVs and laptops and smart phones to convince you to check and stay on top of your credit score or risk the wrath of lenders.

If your score is bad, then by all means you have reason for concern. But if your credit score is already good, is there any benefit to working yourself into the ground trying to make it even better? When it comes to mortgage lending, the answer might surprise you.

Depending on which credit bureau you use (be it illion, Equifax, Experian or others), an ‘excellent’ score is roughly between 800-1000+, whilst 700-799 is considered ‘very good’, and 600-699 deemed ‘good’. Often, applicants will ask if they’ll receive a better rate because of their excellent credit score. But really, an incredibly high score is irrelevant for most mortgage applicants and won’t get you any better rates or services than applicants with very good or good scores.

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Why? Because unlike in unsecured lending (where a high credit score is important as the level of risk is determined by the character of the applicant), in mortgage lending, it’s the property which is offering the lender security. So as long as you’ve proven you’re financially responsible and your credit score isn’t bad, you won’t benefit from it being excellent rather than good as rates are not determined by a credit score.

Whilst having bad credit can push you out of consideration for securing a loan with many lenders, having an excellent score doesn’t help you seal any exclusive deals. It’s pretty much the reverse of everything we were taught at school—to fulfil our full potential, strive for excellence, and then reap the rewards of our hard work. But when it comes to mortgage approvals, an A+ or a Distinction is pretty much akin to getting a B or a Credit. As long as there isn’t a giant F scrawled across the page, you’re good. Once you’ve reached the golden credit score threshold, you’ll be offered the best borrowing terms, with no preferential treatment awarded to those with even better grades.

Only 3.5% of Australians possess a credit score over 1,000, and whilst that’s quite an achievement, gaining membership to this exclusive club really isn’t worth obsessing over. The only perks you might enjoy are bigger lines of credit (that you likely don’t need anyway) and elite credit card rewards (though likely not as exclusive as you might think). It’s also worth noting that different lenders use different algorithms and adhere to different criteria when judging the success of applicants and the benefits they receive, so your impeccable credit score isn’t the only thing they’ll be taking into account.

Along with your credit rating, the most common indicators employed by mortgage lenders to determine the outcome of your application include your borrowing power (i.e. your current financial situation and income), your fiscal character (employment, expenses and lifestyle), loan to value ratio (the percentage of the loan value against the value of the property), and what other collateral you have in case things go south. So, whilst a bad credit rating is definitely something to avoid, joining the 3.5% club mightn’t be all it’s cracked up to be.

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