If you want to take out a loan, you need to have a good credit score. This numerical score shows lenders how trustworthy you are as a borrower. Read on to find out everything there is to know about your credit score, and for tips on how to improve it.
Why does a credit score matter?
Your credit score is important because it may influence how much credit a lender will give you as a borrower. People with low credit scores are generally deemed high risk and therefore may not qualify for the amount they’re seeking. They may also be charged extra interest or denied a loan altogether.
If your credit score is good, it shows a lender you have the ability to meet your financial obligations if they give you a credit or loan.
What affects your credit score?
There are many things that could potentially show up on your credit history and affect your credit score. Sometimes small decisions or small oversights can have a big effect—when clumped together, these small things can send your credit score plummeting.
To maintain a healthy credit score try to avoid:
- Missing a repayment
- Maxing out your credit limit
- Applying for balance transfers too often
- Closing credit cards that have a good repayment history
- Applying for several credit or loan products at once
- Ignoring letters about your credit report
- Not alerting creditors of changes to your information
- Borrowing money to boost your credit score
- Getting a court judgment
- Not regularly checking your credit report.
Understanding your credit score
Your credit score is displayed as a number between 0 and 1200 – 0 being the worst and 1200 being the best. This number indicates the likelihood of an adverse event being recorded on your credit file in the next 12 months.
Your credit score is generally banded like this:
0-509 – below average to average
It’s more than likely that an adverse event will be recorded on your file in the next 12 months.
510-621 – average
It’s likely that an adverse event will be recorded on your file in the next 12 months.
622 – 725 – Good
Adverse events are less likely to be recorded on your file in the next 12 months.
726 – 832 – Very good
It’s unlikely that adverse events will be recorded on your file in the next 12 months.
833 – 1200 – Excellent
It’s highly unlikely that adverse events will be recorded on your file in the next 12 months.
How to check your credit score?
Checking your credit score is free and relatively easy to do. You can check it through national credit reporting bodies (CRBs) such as:
- Equifax Australia (formerly known as Veda)
- Dun & Bradstreet
- Get Credit Score
Each of these CRBs allows you to check your full credit history by ordering a free copy of your credit report once a year, but it’s a good idea to check your credit score as regularly as you can. If you find you have a low score, there are steps you can take to improve it.
Improving your credit score
This budget-making guide tells you in five easy steps how to build a budget that you’ll actually stick to. However, if you’re not happy with your credit score there are a number of ways to improve it. You can:
- Maintain an active credit account
If you’re applying for a new line of credit and you have no lines of credit open, you have no evidence of healthy repayment behavior. Zero credit history could reduce your credit score. As well as taking out a loan or applying for a credit card, you can take out a mobile phone plan or utility account to help build your credit history.
2. Pay your bills on time
It may seem obvious, but it’s the most important factor. Consistent and punctual payments look good for your credit rating. Paying your bills on time is especially important if the bill is for more than $150, as a missed payment of that size can be reported as a default once it’s 60 days overdue. Defaults are one of the more significant black marks that can show up on a credit report.
- Pay off outstanding debts and loans
If you’re not having to stress over existing loans and debts, you’re in a better situation to work on improving your credit score. Loans and debts will continue to be a feature of your credit report until you’ve paid them off, sometimes longer depending on their size and how long it took to pay them.
4. Keep your credit card balances low
A consistently low balance on your credit card is better for your credit score than a higher one. To reduce the size of your outstanding balance, consider switching to a credit card with a lower interest rate or one offering 0% for a certain period of time. A balance transfer can be a good strategy when paying off your credit card.
5. Hold onto safe accounts
The longer a credit account is used without any negative reports (such as a missed payment), the more it can improve your credit rating. Spending regularly on a credit card instead of from your transaction account can actually work in your favor, as long as you pay your debt on time. This is because it shows you’re capable of responsibly using a credit facility.
6. Diversify your credit
If you can demonstrate that you’re capable of managing different forms of credit at once, you could increase your credit score. Consistently meet the repayments of three or more credit types (such as mortgage, car loan and credit card) and you can be seen as responsible with short-term, long-term and fixed payments.
7. Seek professional help
If you have a bunch of black marks or defaults on your credit file, contact a credit repair agency to help you remove them. These agencies specialize in legislation that can determine the authenticity of each negative mark. Bear in mind, however, these agencies can only remove incorrect listings from your file—they’re not miracle workers.
Luke Fitzpatrick is an academic speaker at Sydney University via Glecture. He enjoys writing about tech, productivity, lifestyle, and is a contributor to Forbes.