How to improve your credit score
If it’s time for you to start investigating your finance options, there’s a possibility you’re having a minor crisis about your credit score, and how that might impact your ability to secure finance and purchase a home.
We’re coming in hot, to set the record straight about what your credit score actually is, and how you can improve it if you need to.
What is a credit score?
Well, it’s a phrase we’ve largely adopted from our favourite US sitcoms. Credit scores have entered the zeitgeist of Australians in the last decade, but the reality is, that many still don’t know what it is, how it’s calculated and the impact it can make when attempting to borrow money.
In Australia, this is a three-digit number ranging from 0-1200 (0-1000 for some agencies) that’s used to demonstrate the overall health of your finances and financial behaviours. There are a few different places you can obtain your credit score. Free websites like Finder and Credit Savvy will give you a score only. Alternatively, you can obtain a detailed credit report and score from Equifax, illion and Experian. If you believe there may be an issue with your credit score, this is a great way to see what’s been recorded against your name.
How do lenders use your credit score?
This is a complex question because the answer is all lenders have their own set of criteria and processes, there’s no one-size-fits-all approach here. Many lenders in the market will assess your credit report more generally, although we are beginning to see more assessing based on a score.
It’s important to note that all lenders don’t universally use one credit reporting agency, and not all information is reported to every credit reporting agency either! If a lender indicates there is an issue with your credit report, or file the best thing to do is to visit the agency and purchase a copy of your credit file to identify any problems you may not have been aware of.
How are credit scores calculated?
How exactly do credit reporting agencies calculate your credit score? They use a number of indicators including; your level of debt, the kinds of debt you have, your bill payment habits and the number of enquiries you have on your credit file. Each agency’s algorithm for calculating your credit score likely differs slightly, but you should find the score stays relatively consistent across agencies.
Your credit reports might include serious infringements like bankruptcies and defaults together with indications on the number of times and types of credit that have been applied for, even if you haven’t accepted them, and whether you pay your bills on time - like your telco and utilities providers.
Your credit report will also show a lender how much debt you currently have, including the limit on your credit cards and any personal loans in your name. It’s also important to note that previously unreported lines of credit from Buy Now Pay Later schemes have changed, and these types of credit are now regulated and can be reported on your credit file.
All these things added together create the credit score provided by a credit reporting agency to give a snapshot of whether your credit habits are excellent or need a little work.
So, how can I improve my credit score?
If your score isn’t quite as high as you’d like it to be, there are a number of steps you can take to boost it.
Assess your lines of credit
If you’re in the process of looking to secure a mortgage, now is a great time to take a good look at your lines of credit and if necessary, see where you can reduce limits, or get rid of credit altogether. Credit cards and personal loans have a significant impact on the amount of money the bank assesses that you’re able to borrow.
Reduce the enquiries on your file
Every time you apply for credit, it’s lodged against your credit file as a ‘hard’ or ‘soft’ enquiry. While switching energy providers or taking out a new phone plan would be soft enquiries, making applications for credit cards and loans are considered hard enquiries, and a lot of these make for a ‘busy’ credit file, which damages your score, even if you don’t accept the finance!
Ensure your bills are paid on time
In recent years changes were made to legislation in Australia, which means that bill providers can and will report late payments to credit reporting agencies, and this has the capacity to impact your credit score. Where possible consider automatic direct debits to ensure nothing slips through the cracks.
Frequent change of address of employer
Banks love stability and consistency. When it comes time to securing finance, your behaviours matter too, if you’re frequently changing jobs or digs, this might send some red flags to your credit score.
Strong stability for a minimum of 6 months in these areas, but preferably longer, will have a positive impact on your credit score and ability to obtain a mortgage.
Now that you’ve got the 101 on credit scores, you can make a gamer plan to level up and reach a new high score. And a word of caution - be wary of any paid agency that promises they can improve your credit file for you. This is a government-regulated system, and it can’t be tricked!
If you want to chat about your credit score, and the options available to you? Book a call with Lenny.