Is your credit rating looking a little worse for wear? Here are our tips to help you get it back into shape ahead of your next big purchase.
Nearly everyone needs to borrow money at some stage, to fund the purchase of a vehicle, home and contents or even a holiday. That’s why your credit score, also known as a credit rating, is so important.
What is a credit score?
Lenders use your credit score to work out how reliable you’re going to be as a borrower. Whether it’s for a home loan, personal loan or credit card, having a good credit score means lenders will be more likely to lend you money. A poor credit score will make it harder for you to borrow money, as lenders might view you as a higher risk. You may even have to pay a higher rate of interest than someone with a good credit score.
How can I check my credit score?
Your credit score is found in your credit report, which is held on file by credit reporting agencies. You’re entitled to a free copy of your credit report once every three months. You can get it from these three credit reporting agencies:
Each agency calculates your score slightly differently, and may hold different information about you, so it’s worth checking with each.
How is my credit score calculated?
Your credit score is based on your personal financial information, which is collected from lenders, service providers and public records. Things that can influence your score include:
how much you owe and the type of borrowings
how many credit applications you make
whether you make repayments on time
whether you’ve defaulted on any debts in the last 5-7 years
any bankruptcies, court judgments or personal insolvency agreements in your name.
From 1 July 2021, comprehensive credit reporting (CCR) became mandatory for the major lenders, requiring them to provide more detailed information about your financial history, such as:
any credit products you’ve held in the last two years
your usual repayment amount
how often you make repayments and whether you pay on time.
From 1 July 2022, lenders will be required to also provide financial hardship information. The CCR scheme aims to give lenders a more accurate picture of your capacity and ability to repay credit.
Great, so how can I improve my credit score?
Finding out that you have a low credit score can be worrying. Fortunately, there are steps you can take to improve your credit score and keep it high:
Pay your bills on time
Always pay bills like utilities, rent, mortgage, tv, internet and phone services on time, especially if the bill is worth more than $150. If a bill costs over $150 and is at least 60 days overdue, a default can be listed on your report, which remains there for five years.
Related: Top negotiating tips to reduce your bills now
Pay credit card, loan and other debt repayments on time
Making debt repayments on time and in full shows lenders that you can be trusted to meet your obligations. Having a good repayment history can even help boost your credit score, for example, paying off your credit card in full each month.
Limit how many credit applications you make
Every time you apply for credit, such as a new loan, credit or store card, the application is listed on your credit report. Making lots of applications in a short space of time may affect your score, as it looks like you’re in credit distress. Only apply for credit if you genuinely need it.
Pay off your debts
It’s generally the case that the less debt you’re carrying, the better your borrowing capacity is. So pay off your personal loans, close credit and store cards that you’re not using and reduce the limits on any other credit cards you hold.
Fix errors on your report
Finally, it’s worth checking your full credit report carefully to make sure that it’s accurate. From time to time, incorrect information can be added to your report, which can negatively impact your credit score. If you do notice an error on your report, contact the credit provider and/or credit reporting agency and ask them to amend your report. Avoid using a third party ‘credit repair’ company to clean up your report, as they are only doing what you can do yourself for free.
By taking these simple steps, you can expect to see your credit rating improve gradually, over time. However, if you’re having trouble paying your bills on time, struggling to manage debt or having other financial difficulties, seek help from a financial counsellor as soon as possible.
Money & Life, FPA