How to improve your credit score before applying for a loan: A guide for property owners

Whether you’re looking to refinance your mortgage, purchase a new investment property, or secure a loan for renovations, your credit score plays a crucial role in determining your loan eligibility and the terms you’ll be offered. Improving your credit score before applying for a loan can significantly enhance your chances of approval and help you secure better interest rates. In this guide, we’ll explore practical steps that property owners can take to boost their credit score and prepare for their next loan application.

Understanding your credit score

Your credit score is a numerical representation of your creditworthiness, reflecting your history of borrowing and repaying debts. In Australia, credit scores typically range from 0 to 1,200, with higher scores indicating better creditworthiness.

Factors influencing your credit score

• Payment history: Timely payments on credit accounts, loans, and bills are critical to maintaining a good credit score.
• Credit utilisation: The amount of credit you’re using relative to your available credit limits can impact your score.
• Length of credit history: A longer credit history with consistent, responsible use of credit is beneficial.
• Credit mix: A diverse mix of credit accounts, including credit cards, mortgages, and personal loans, can positively influence your score.
• Recent credit inquiries: Multiple credit inquiries in a short period can lower your score, as it may indicate a higher level of risk.

Steps to improve your credit score before applying for a loan

Improving your credit score takes time and consistent effort, but the benefits of a higher score can make a significant difference when applying for a loan. Here are some actionable steps property owners can take to boost their credit score.

1. Review your credit report

The first step in improving your credit score is understanding your current standing. Obtain a copy of your credit report from one of the major credit reporting agencies in Australia, such as Equifax, Experian, or illion. Review your report carefully for any errors or discrepancies, such as incorrect account information or unauthorised credit inquiries.

Action items:

• Dispute errors: If you find any inaccuracies, contact the credit reporting agency to dispute them. Correcting errors can lead to an immediate improvement in your score.
• Monitor your report regularly: Regularly monitoring your credit report helps you stay on top of your credit situation and quickly address any issues that arise.

2. Pay your bills on time

Payment history is one of the most critical factors affecting your credit score. Consistently paying your bills on time, including credit card payments, mortgage payments, and utility bills, can significantly boost your score.

Action items:

• Set up automatic payments: To ensure you never miss a payment, consider setting up automatic payments for your bills.
• Create a payment calendar: Use a calendar or financial management app to track your due dates and plan your payments accordingly.

3. Reduce your credit card balances

High credit card balances relative to your credit limit can negatively impact your credit score. Aim to keep your credit utilisation ratio (the percentage of your available credit you’re using) below 30%. Paying down your credit card balances can quickly improve your credit score.

Action items:

• Pay more than the minimum: Whenever possible, pay more than the minimum amount due on your credit cards to reduce your balances faster.
• Distribute balances: If you have multiple credit cards, consider spreading your debt across them to reduce the utilisation ratio on each card.

4. Avoid opening new credit accounts

Each time you apply for new credit, a hard inquiry is made on your credit report, which can temporarily lower your credit score. Avoid applying for new credit accounts unless absolutely necessary, especially in the months leading up to a loan application.

Action items:

• Limit credit inquiries: Only apply for new credit when it’s essential, and be selective about the credit offers you pursue.
• Consider alternative financing options: If you need additional funds, explore options that don’t require a hard credit inquiry, such as borrowing from a friend or family member.

5. Keep older credit accounts open

The length of your credit history accounts for a portion of your credit score. Closing older credit accounts can shorten your credit history and potentially lower your score. Even if you’re not actively using an older account, keeping it open can benefit your credit profile.

Action items:

• Keep accounts active: If you have older credit cards that you no longer use, consider making a small purchase and paying it off each month to keep the account active.
• Resist the urge to consolidate: While consolidating debt can simplify payments, closing old accounts in the process can reduce your credit score.

6. Diversify your credit mix

Having a variety of credit types, such as credit cards, a mortgage, and a car loan, can positively impact your credit score. However, it’s essential to manage these accounts responsibly and avoid taking on more debt than you can handle.

Action items:

• Use different credit types: If you primarily have credit card debt, consider adding a personal loan or line of credit to diversify your credit mix.
• Manage new accounts wisely: Only take on new credit if you can comfortably manage the additional payments.

7. Pay off any outstanding debts

Outstanding debts, especially those in collections, can significantly damage your credit score. If you have any overdue accounts, make it a priority to pay them off or negotiate a payment plan with your creditors.

Action items:

• Prioritise high-impact debts: Focus on paying off debts that have the most significant negative impact on your credit score, such as collections or charged-off accounts.
• Negotiate with creditors: If you cannot pay the full amount, contact your creditors to discuss possible payment arrangements or settlements.

How long does it take to improve your credit score?

Improving your credit score is not an overnight process. It typically takes several months of consistent effort to see significant improvements. The time it takes can vary depending on the current state of your credit and the specific actions you take. However, the sooner you start implementing these strategies, the sooner you’ll begin to see positive changes.

Why improving your credit score matters

A higher credit score can open doors to better loan options, including lower interest rates and more favourable terms. For property owners looking to refinance, invest in additional properties, or undertake renovations, improving your credit score can lead to substantial savings over the life of a loan.

Benefits of a higher credit score

• Lower interest rates: Lenders offer lower interest rates to borrowers with higher credit scores, which can save you thousands of dollars over the life of a loan.
• Better loan terms: A higher credit score can qualify you for more favourable loan terms, such as lower fees and flexible repayment options.
• Increased borrowing power: With a higher credit score, you may be eligible for larger loan amounts, giving you more flexibility in your financial planning.

Get started

Improving your credit score before applying for a loan is one of the most effective steps property owners can take to enhance their financial position and secure the best possible loan terms. By taking proactive steps to manage your credit responsibly, you can boost your credit score and increase your chances of loan approval. Whether you’re planning to refinance your mortgage, invest in a new property, or fund renovations, a higher credit score will give you the leverage you need to achieve your financial goals.

To learn more about loan options and how your credit score can impact your financing opportunities, explore our resources and guides available on our Borrow page.

Learn more

For additional resources and information on improving your credit score and preparing for a loan application, explore these helpful links:

• Understanding credit scores in Australia
• Tips for managing your credit profile

By taking control of your credit and implementing these strategies, property owners can enhance their financial health and secure the funding they need for future investments.