What do New South Wales, Victoria, and your friend who developed a bad payday loan habit during lock have in common? Their credit scores have dropped this year. Although a state government’s credit score is a bit more complicated than an individual score, they essentially dictate the same thing how much money they can borrow and with what terms.
A credit score is an accumulation of your financial history, representing your creditworthiness as a borrower, aka your likelihood to repay a loan. The score can be affected by any credit contract you have entered into – from your phone bill to your mortgage repayments. It includes the details of your current and past credit holdings, repayment history, overdue accounts and both successful and unsuccessful credit applications.
Your credit score will sit on a scale from 0-1000 or 1200, with scores on the higher end potentially allowing you to borrow more money, and even give you access to lower interest rates. If you’re looking to take out a mortgage in the near future and wanting to maximise your borrowing power, we’ve compiled a list of tips to potentially improve your credit score.
You must know your credit score to be able to understand and improve it. You can check your credit score through multiple online providers, with a relatively simple process. With just a few personal details and a piece of identification, sites like Canstar can give you your credit score in minutes. Wherever you choose to check your score, the data will be taken from one of Australia’s three credit-scoring agencies Experian, Equifax and Illion. Each one has a different rating system, meaning your score will vary slightly depending on the scorer.
Below Average: 0-505
Very good: 756-840
Below Average: 0-549
Very good: 700-799
Zero Score: 0
A Low Score: 1-299
Room For Improvement: 300-499
It’s not unheard of for a credit provider or reporter to make an error when reporting on your credit score. Debt amounts can be incorrectly recorded, reported twice, or mistakenly flagged as overdue. If you notice any errors on your credit report, your credit reporting agency or credit provider should amend them for free if contacted directly. Be wary of companies that claim to be able to clean’ your credit score by removing information, as only verifiable errors can be removed.
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Even the occasional slip of the memory to make the repayment on your phone bill will be reflected in your credit score. Direct debit is an invaluable tool to ensure that you don’t lower your score due to human error. Most companies who require regular repayments will offer a direct debit service. Go the extra mile and set up automatic transfers into your bills account so insufficient funds don’t catch you out.
Your credit score is based on every credit contract you have entered, even the smallest ones. It’s not the size that matters, as it’s a representation of how likely you will be to make your regular repayments. In this day of credit, it’s very easy to take on multiple credit commitments – Afterpay, credit cards, bills and utilities. Make sure to keep a record of credit commitments and anything requiring regular repayments to avoid missed repayments or unknown debt.
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Multiple credit applications in a short time frame will result in a literal red flag on your credit report. It indicates to the lender that you may have experienced financial stress during that time, making you a more risky customer. Payday loans are particularly harmful to your credit score health, as they are considered a riskier lender.
Avoid the trap of taking out credit cards or payday loans to buy things you don’t need urgently need besides saving up for them is a lot more fulfilling.
Forgetting to update your address when moving house can potentially impact your credit score, allowing unpaid bills and fines to slip through the cracks. This also includes transferring utilities out of your name to avoid any nasty surprises in months down the track. However, although it’s not recorded on your credit score, frequently changing jobs and residences can indicate a lack of instability to a potential lender, making you a more risky customer.
If a change of address is still on the cards, your detailed list of credit commitments will make the transition a lot easier.
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One simple yet effective tactic to boost your credit rating is having a large savings account. Emergency savings can prevent you from stumbling into tricky financial situations, giving you the freedom and peace of mind to pay your bills on time.
Opt for a high-interest savings account so your emergency funds can accumulate interest.
Depending on how you use it – a credit card can be your best friend or worst enemy. A well-managed credit card is an invaluable tool for improving your credit rating by providing extensive evidence of your ability to make regular repayments. The high-interest rates on credit cards make them a risky tool in the credit score boosting arsenal, so remember to track your spending habits. Using your credit to pay for day-to-day expenses like groceries, petrol and utilities, and paying it off entirely at the end of each month, is a great way to strengthen your credit rating whilst avoiding interest. To remove any temptation of making extravagant purchases, choose the lowest credit card limit that works for your budget.
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Your credit score refreshes every 5 to 7 years (depending on the type of overdue debt), so you don’t have to shoulder the consequences of the financial mistakes of your youth forever. Employing a few of these tips over a five-year period will ensure you have much healthily credit rating in the not so distance future.
If you find your self in an unavoidable situation that prevents you from making your regular repayments, contact your service provider to see what assistance they can offer. In certain cases, like illness or unemployment, you can ask for your lender to arrange a hardship variation under Australia’s credit laws. You and your bank can potentially negotiate a lower rate of repayment, restructure the loan, forgo fees or switch to interest-only. Hardship arrangements don’t usually affect your credit rating, as long as you are still making your repayments on time.
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Any government assistance you may have received due to COVID-19 will not affect your credit score. And the same rules apply for hardship variations during COVID-19 if you contact your bank directly and keep making payments on time, your credit score shouldn’t suffer.
If you need help managing your money, the National Debt Hotline offers free financial counselling.
Words by Nell Matzen
Has your lender made the cut? Take advantage of when lenders start dropping their rates. Talk to us if you need help organising your refinancing or a pre-approval!