Credit Is Your Friend: Why First Home Buyers Should Embrace It

Oct 5, 2024

4 min read

For many first home buyers, the dream of owning a home is often accompanied by the desire to have a clean slate—free from debts and financial burdens. While the idea of being entirely debt-free might seem idealistic, it can also present challenges when applying for a home loan. In today’s financial landscape, having some liabilities and a positive credit history can actually work in your favour, showcasing your reliability and capability to manage credit. Let’s delve into why having a credit file is crucial for first home buyers and how you can build a solid credit profile to ease your journey toward homeownership.

The Misconception of a Debt-Free Life

Living without any liabilities certainly has its perks. You can enjoy a sense of financial freedom, and the absence of debt means less stress in your monthly budget. It’s understandable that some may perceive this as an admirable quality; after all, not going into debt to buy something you can't afford reflects responsible financial behaviour. Saving diligently to purchase your first home outright is indeed commendable. However, when it comes to applying for a mortgage, a lack of credit history can be a significant hurdle.

Lenders want to see that you have experience managing credit responsibly. Without this history, they may perceive you as a higher risk, which can complicate the approval process for your home loan.

The Importance of a Credit File

A credit file is essentially a record of your credit history and behaviour, maintained by credit reporting agencies. It contains information such as your credit accounts, payment history, outstanding debts, and any defaults or bankruptcies. When you apply for a loan, lenders review your credit file to assess your financial reliability and ability to repay the loan.

For first home buyers, having a positive credit file can make a world of difference. It signals to lenders that you are capable of managing credit responsibly, which can lead to easier approvals and potentially more flexibility in your application process. In contrast, without any credit history, you might find yourself facing stricter scrutiny and longer processing times.

The Impact of Credit on your Borrowing Capacity

It’s important to understand that various forms of credit, such as credit cards, personal loans, and buy-now-pay-later services (like Afterpay), can impact your borrowing power. Lenders assess these liabilities when determining how much they’re willing to lend you.

For example, a $1,000 credit card facility might affect your usable income by roughly $38 per month. This reasonably small amount reflects your capacity to manage credit without significantly impacting your overall financial profile. In contrast, larger personal loans or multiple credit accounts can create a more substantial burden, potentially reducing your borrowing capacity significantly.

Building a Trustworthy Credit Profile

You may be wondering how you can create a positive credit profile without diving headfirst into debt. Fortunately, there are several strategies to build your credit history while keeping your finances in check.

1. Start with a Small Credit Card

One of the simplest ways to establish credit is by obtaining a small credit card with a limit of around $1,000. This card can serve as an emergency resource, allowing you to handle unexpected expenses without relying on personal loans or other forms of credit. The key is to use the card responsibly—make small purchases and pay off the balance in full each month. This not only helps you avoid interest charges but also demonstrates to lenders that you can manage credit effectively.

2. Open a Mobile Phone Account in Your Name

If you currently have a mobile phone account under your parents' name, consider transferring it to your own name. Establishing your own mobile phone account shows lenders that you can manage recurring payments. Just like credit cards, mobile phone contracts can contribute to your credit history. Ensure that you make your payments on time to further enhance your credit profile.

3. Consider a Personal Loan with Caution

If you're comfortable, taking out a small personal loan can also help you build credit. Ensure that you choose a loan with manageable terms and only borrow what you can repay comfortably. Regular, on-time repayments will reflect positively on your credit file, further establishing your creditworthiness.

4. Utilise Other Forms of Credit Responsibly

Other forms of credit, such as buy-now-pay-later services or retail store credit, can also contribute to your credit history. However, be cautious with these options. Only use them for purchases you can afford to pay off quickly, and always make your payments on time. The goal is to showcase responsible credit management.

The Benefits of a Positive Credit History

Having a solid credit file can offer several advantages when you're ready to apply for a home loan:

Faster Approval Times: Lenders often expedite applications for borrowers with a positive credit history. This means you could move into your new home sooner rather than later.
Increased Borrowing Capacity: A strong credit profile may allow you to borrow more, providing you with greater options when choosing your first home.

Conclusion

While the idea of being completely debt-free may appear attractive and the notion of saving diligently is commendable, first home buyers should recognise the importance of having a credit history. By taking small, manageable steps to establish credit, you can build a positive credit file that will make the home-buying process smoother and more efficient.

Starting with a small credit card, opening a mobile phone account in your name, and responsibly managing other forms of credit can significantly enhance your credit profile. In a world where lenders rely heavily on credit histories, showing them that you can be trusted with credit is a vital step toward achieving your dream of homeownership.

The key take-away is remember that a little credit can go a long way. With careful planning and responsible management, you may just be one step closer to owning your First Home.