Interest rates rises are set to occur for the first time in more than 12 years. The last time the RBA actually lifted the official cash rate was back in 2010. The RBA cut the cash rate as a stimulus measure in 2020 to the current level of 0.1% where it has been left since November 2020. A rise in the cash rate by the RBA will flow through the lending markets and lead to interest rate rises across many personal loan and business finance sectors.
Achieving the cheapest interest rate is key to securing the cheapest loan. When rates are at record lows, a small incremental difference in the loan rate offered may be inconsequential to some people. But as interest rates rise, every small gain in a lower rate is sure to be valued highly.
When assessing loan applications lenders review credit scores and with interest rate rises due the significance of maintaining a good credit score increases. Credit scores and ratings represent essentially risk. Lenders see good or high credit scores as having a lower risk than those with low credit scores. The risk being the assurance of the loan commitments being met.
With credit scores to the fore, those planning to apply for loans and finance as interest rates rise, may improve their prospects of being offered the lowest interest rate by appreciating what goes into calculating credit scores and addressing the recommended actions to improve or maintain a good credit rating.
Understanding Credit Rating and Profile
Credit rating, credit score – essentially they mean the same and are included in a credit profile or report. A credit report of profile is not something that people need to set up themselves. It is created through reports or entries made by companies that provide credit. These can include service providers such as telcos, power companies and others as well as banks and finance companies.
When someone applies for a loan, defaults on payments and other payment activities are reported and recorded. The actual score is then calculated and reveals a number between zero being bad credit and maximum of 1,000/1,200 at the good or best end.
Individuals and businesses can have credit scores and profiles which are assessed by lenders when a loan application is made. For sole traders, lenders may assess both. Guarantors of loans for say children buying their first car or motorbike, may also have their rating reviewed.
Companies report credit activity to the Credit Reporting Agencies who compile and store the data. The data is accessed and reviewed by lenders and other credit providers as required. The major companies in this space are:- Experian, Ilian and Equifax. Individuals can access a copy of their credit report in a number of ways. Refer to Moneysmart to read more about credit scores and advice on securing a free copy of your report.
One very currently applicable tip when checking the entries on a credit profile is to ensure all the entries do relate to you. If you see activity that you know was not you, it may indicate your identity has been compromised and someone else is using your identity to fraudulently apply for loans. Contact authorities immediately if this is the case.
Impacts on a Credit Rating
Recent reports reveal a change in credit card use in recent months. A change which may impact an individual’s credit score or rating. During the height of the pandemic, with many months spent in lockdown with less spending options, many individuals used available funds to pay down credit card balances. Many paid off and cancelled cards completely.
But with the economy opening up and life and spending opportunities returning to more normal levels that approach to credit card usage appears to have changed. Media reports a rise in the use of credit cards recently.
Credit cards do have an effect on a credit rating. The more cards and the higher the balances can reflect poorly on credit scores.
Consistently making late payments for bills such as mobile phones, streaming services, power, rent, loans and other services can be reported and negatively impact the score. Note that requesting payment deferrals during the pandemic as offered by the banks and other lenders was stated as not negatively impacting credit profiles.
Another item which will likely surprise many is that making numerous applications for the same loan can impact the credit rating negatively. Yes. You think you’re doing the right thing by getting a number of loan offers and quotes to ensure you have covered the market and got the cheapest, not realising the negative effect this process can have.
This can be avoided by using a broker such as Jade Finance to source your loan quotes and arrange your finance. Offers obtained using our services do not reflect negatively on credit scores.
Significance of Credit Score to Loan Interest Rates
Now to the crux of the issue – how the credit score affects the interest rate you may be offered for a loan or finance. As mentioned above, lenders access the data in credit profiles with the approval of the loan applicant. This information allows the lender to form a view as to the credit worthiness of the individual or business. This view forms their assessment of the interest rate to be offered.
A low or bad credit score typically attracts a higher interest rate than a good credit rating. You’ll notice on advertisements for interest rates, a point is usually included stating that is the rate offered for new goods and to applicants with good credit.
So in order to be offered the cheapest interest rate loan, keep your credit score in the good band range. If you’re wondering what the difference in repayments is for lower or higher interest rate loans, simply use one of our loan calculators. By varying the interest rate by even a fraction of a percentage point, you’ll immediately see how that can change how much is due in loan repayments each month.
Actions which can be Taken
After all that information, some positive info in that there are actions that both individuals and business can take themselves to improve or maintain a good credit score.
- Fix any errors in the credit report as per the process outlined at Moneysmart.
- Keep balance sheet in positive territory by reducing liabilities.
- Pay down existing loans where possible prior to applying for new loans. That would reduce the liabilities and increase the assets as you would own the goods.
- Reduce credit card balances.
- Pay your bills on time – set up direct debits if you are the forgetful type.
- Don’t apply to multiple lenders for the same loan – use a broker – use Jade Finance.
The RBA is tipped to call the first cash rate rise in May or June. But more increases will likely follow. So an increasing interest rate scenario is setting in. While Jade Finance consultants always seek to achieve the cheapest interest rate loans, there are responsibilities on the part of the loan applicant to address their credit score.
Contact Jade Finance 1300 000 008 to source quotes for personal loans and business finance
DISCLAIMER: NO LIABILITY IS ACCEPTED IF ERRORS OR MISREPRESENTATIONS ARE FOUND IN THIS ARTICLE. THE ARTICLE IS PREPARED AND PRESENTED FOR GENERAL INFORMATIVE PURPOSES AND IS NOT INTENDED TO BE THE SOLE SOURCE OF INFORMATION FOR MAKING FINANCIAL DECISIONS. THOSE REQUIRING GUIDANCE AND ADVICE SHOULD CONSULT A FINANCIAL ADVISOR.