Banks and lenders use credit scoring as a key metric in determining whether an applicant is 'credit-worthy' or suitable for a loan.
In a nutshell, your credit score is a measure of all your debt and credit history, and paints a picture to prospective lenders about how 'risky' or 'safe' it may be to lend you money.
People with a higher-than-average credit score are considered lower risk and will generally find it easier to secure finance, whilst the opposite may apply to those with a low credit score.
Your credit score can have an impact on what products lenders will offer you, how much you can borrow and the interest rates you receive. That's why it pays to keep on top of your credit score.
Your credit report contains the information used to calculate your credit score.
It contains information such as:
- 24-month history of your loan repayments, including late payments or defaults
- Information about your credit accounts (loans and credit cards).
- Credit enquiries or requests made by lenders for your credit report in the last 5 years.
- Bankruptcies or court judgements in your name.
You can request a free credit report every three months, any time you've applied for credit and been declined, and any time you've requested a correction on your report.
While credit providers and credit reporting bodies must take steps to get things right, it's not uncommon to find mistakes or errors.
In particular, check to make sure that there are no late payments incorrectly listed for any of your accounts and that the credit limits for each of your open accounts is correct.
If you find errors on any of your reports, you can and should dispute them with the credit reporting bodies or credit providers.
This can be as simple as a phone call to the bank or credit provider that posted the error, explaining the error and asking them to remove it. Make sure to be polite and provide as many details as possible, such as the date of the error, any reference numbers shown and a clear explanation as to why you believe it's an error. More times than not, the provider can resolve your issue on the spot.
Failing the above, you can request a correction on your report through the same credit reporting body from where you obtained your credit report. This is usually done in writing through a web form or email which can be useful as it allows you to keep a paper trail of your communications as well as provide/upload any documentation to support your case.
The lender or credit provider should notify you of their decision in writing within 30 days.
This is one of the easiest ways to increase your credit score.
Since the introduction of Comprehensive Credit Reporting, most credit providers now report your repayment history on your credit file.
If you miss a repayment by more than 14 days, your lender/credit provider will mark this as a late repayment on your credit file, which can negatively affect your credit score. On the contrary however, each time you make a repayment on time, your lender/credit provider will mark it as an 'on-time' repayment.
The longer you have a credit facility open (such as a credit card or home loan) with consecutive 'on-time' repayments, the faster your credit score will improve, as this demonstrates your ability to effectively manage your credit.
Setting up direct debits and/or periodical repayments from your bank account to your credit facility on or before the due date each month is a simple yet effective way to ensure you never miss a repayment, and will in turn help you improve your credit score.
Whenever you apply for a loan, credit card or any type of finance, the lender will place a 'credit enquiry' on your credit file.
This is often referred to as a 'hard enquiry'.
The lender reports the date of your enquiry, the type and amount of credit applied for on your credit file. In return, the lender is able to retrieve and view a copy of your credit file. The lender will be able to view all enquiries you have made in the last 5 years, in addition to other information on your file.
Too many 'hard enquiries' in a short space of time can negatively affect your credit score, which in turn can reduce your chances of finance approval, especially if the enquiries are for for unsecured finance (such as credit cards and personal loans).
To avoid impacting your credit score & credit file with multiple enquiries, it's important to do the following:
- Only apply once with a single lender for the product(s) you are after.
- If your application is rejected or declined, make enquiries with the lender and/or broker as to the reasons. It's important to understand what the issues are as it will help you better prepare for the next time you apply.
- Check your own credit file/credit score prior to re-applying. Checking your own credit score/credit file is considered a 'soft inquiry' and doesn't affect your credit score.
- If possible, apply through an experienced finance broker (such as Credited Finance). An experienced broker will review your situation prior to applying and will be able to advise you of any potential issues, as well as review your borrowing capacity and serviceability without affecting your credit score.
In the age of convenience, many people can be tempted into using 'quick-cash' products to buy a new TV or a new pair of shoes.
But the reality is, these products hurt your credit score more than most other products.
Whilst it sounds counterintuitive, you're much better off buying a TV or a new pair of shoes on a credit card and paying it off over time over instead of getting a BNPL facility or using a payday lender, as consistent repayment history on a credit card will improve your credit score, whilst a BNPL or payday lender application will significantly reduce it.
BNPL facilities and pay-day lenders can also be viewed as poor financial management by other lenders as it shows you're spending money you don't have on non-essential items.
If you are currently using, or regularly use these types of facilities, it's generally a good idea to pay them out and close them before applying for any type of conventional finance products (such as a home loan or credit card).
