A CREDIT SCORE GUIDE - MAKE SURE YOU GET CREDIT WHERE CREDIT’S DUE
The importance of your credit score... A survey for this year’s Credit Awareness Week revealed that more than a quarter of people claim they know their current credit score, showing that a significant number of people are now taking the time to get to know their credit report and how lenders use it. But why does it matter? And if you’ve had problems managing credit in the past, what can you do to help make sure your credit history recovers and supports your financial goals? Let me start by explaining what your credit report and your credit score are and why they are important. Your credit report is your track record at managing a wide variety of agreements such as loans, credit cards, mortgages, mobile phone contracts, bank accounts and even some regular household bills such as energy, water and broadband. Your report, which generally covers the past five years, also includes relevant public records such as official financial records like defaults, judgements and insolvencies (eg bankruptcies, and debt agreements). When you apply to borrow money or set up a new agreement that includes a credit facility, the provider will usually access your credit report to help it decide whether to say ‘yes’. If your application does get the nod, the information on your report can also help determine the terms they offer you, such any borrowing limit and rate of interest. Essentially, the lender will use your report to try to predict how you’ll behave in the future, based on how you’ve repaid credit in the past. The lender might also assess the information on your application form (about your occupation and income, for example) along with any information they already know about you if you’ve been a customer before. Credit reports are compiled by the Australia’s main ‘credit reference agencies’: Experian and Equifax (Previously known as Veda). Because lenders voluntarily share customer information with the agencies and some lenders choose to only work with one of them, your report at each agency can differ slightly. Most lenders process large volumes of credit applications so to help them do this quickly and fairly they often use an automated process called credit scoring to do the legwork. Scoring turns the information the lender has about you into a single number called your credit score. This score reflects the risk (probability) that you’ll miss payments in the future. The higher your score, the lower the risk. The higher your score, the higher your chances of getting credit and being given the best deals. Equifax Credit Score has a scale of 0-1200. If your score is 833 or higher this is classed as excellent and means you should be able to access cheap borrowing from a wide range of providers. Get a below average score (509 or less) and you might struggle to be accepted for mainstream credit and, if you do find someone prepared to lend to, they’re likely to charge you a higher interest rate. So it can certainly make financial sense to check out and regularly monitor your credit score and look for ways to improve it. General credit score tips:
Build a positive track record. Use some credit, stay within credit limits and never miss a repayment. Setting up Direct Debits can help.
Don’t max out your credit cards. Ideally, keep balances below 30% of the limit on each account. You don’t want to appear over reliant on borrowing.
Space out new credit applications. You want to avoid looking needy. If an application is refused, find out why before trying again.
And if you’re recovering from a period of problem debt:
Insolvencies, such as bankruptcies, and Debt Agreements, are bad news for credit scores in the short term but can fall off your credit report five years after they first appear, as long as they have finished. Court judgments fall off your credit report after five years.
Up to date: Make sure your credit report is updated to reflect 1) the current balance of any accounts still showing and 2) the status of court or insolvency record. As account balances are cleared, each of your lenders should update the information on your report to show ‘paid’ (defaulted accounts are satisfied, non-defaulted accounts settled).
Defaulted accounts stay on your credit report for five years from the default date regardless of subsequent payment. In the eyes of most lenders, a satisfied default is preferable to an outstanding default. Some lenders have rules about not lending to customers with outstanding or, sometimes, just past defaults at all. The same is often true of court judgments. Helpfully, lenders will usually advertise this upfront.
The impact of negative information on credit scores often reduces as it gets older. Lenders tend to focus on your more recent track record, underlining the importance of building a new positive profile after a period of problem debt. If you can do this while negative entries are still showing you can avoid the trap of ending up with no credit history at all, which is also bad news for credit scores. Getting a ‘credit builder’ type credit card can be a useful stepping stone.
Try and avoid consolidation loans, especially with payday lenders. Whilst some leave no trace on your credit file most will charge a very high rate of interest. In some cases, you may end up paying back more than double what your borrowed in a very short space of time. Those that do leave a mark on your credit file may be viewed negatively by mainstream banks and lenders. They also negatively impact your credit file leading to a lower credit score.
Do your homework: if you’re planning to apply for ‘credit builder’ card (aimed at people with a low credit score), or any other type of credit for that matter, be sure to check any fees and interest rates that apply. Some cards are aimed at people with lower incomes and seen as ‘first credit cards’ the help in building your credit score.