Understanding credit scores should not require a PhD in macroeconomic policy. But having a strong understanding of how they are formulated and how it could affect you in the future may help you in buying your first or next home. So, in a nutshell, what are credit scores?
Credit scores and credit ratings, what’s the difference?
None! Pick a term and stick to it. A credit score (generally between 0-1,000) provides lenders (i.e. banks) with an indication of how well you will be able to pay off the terms of any credit they provide to you. Above 800? That means you score as ‘excellent’. 600-800 is ‘good’, followed by average and below average.
Only just treading water in a rip current of debt? Consistently been late in your repayments of bills and credit card repayments? These sorts of indicators tell the bank that you may be cause for concern when lending money, and your credit score is a numerical representation of this.
Where can I find my credit score?
The Office of the Australian Information Commissioner (turns out that is a thing) lists three credit reporting bodies that you can contact for your credit score:
It is incredibly easy to do and you have the right to request your credit score from one of these bodies at least once a year, if you have been refused credit within 90 days, or if your personal information has changed.
Why do I have a bad credit score?
There is a range of factors that can result in you receiving a low credit score.
As mentioned before, the most obvious culprits are:
- Having a history of being late in your bill repayments (typically, over 60 days).
- Consistently being late in your credit card repayments.
These are the two that most people think of when they look at a bad credit score, but there are a few less-obvious factors:
- Be cautious of applying too often for credit cards or loans. A ‘hard check’ done by a lender on your credit score can negatively affect your credit score. Note: this does not extend to you personally asking for your credit score from a credit reporting body (known as a ‘soft check’).
- A lender may look at the accumulated cap of your credit limit (i.e. across multiple credit cards) and deem you an unacceptable risk. For this reason, it is worth being cautious about happily accepting credit card limit increases on too many cards, even if you aren’t utilising the increased limit.
- Being rejected too many times for a credit card or loan can affect your score, so be smart about how you approach accessing a loan and do your research into appropriate lenders for your financial situation.
How can I improve my credit score?
- Most importantly, pay off your debt. You won’t be able to service your credit debt with more debt.
- Once your credit card/s are paid off, rather than immediately deleting your credit card accounts (as this can negatively affect your credit score), place your card/s away in your dresser and see what life is like without relying on that debt. Keeping your credit spend down can positively affect your credit score.
- Set up automatic payments in your online banking account to service your debts from your salary, while also transferring money to key areas, i.e. rent/mortgage payments.
- Prioritise paying your bills on time. This can be hard with stresses such as food bills, but you will save money on your bills if you pay them on time, and those savings can be passed on to your food bills.
- Check your complete credit score report for inaccuracies, and report these.
- Once you have control over your finances, using a credit score effectively (keeping your spend down and paid on time) can be beneficial for your credit score, as using debit cards as a complete replacement does not have an effect on your score.
Having a negative credit score can be an indication of larger financial stresses that you are under. Anybody can find themselves in financial trouble, and there are resources you can access to help you manage your debt and get on top of your finances.