Have you ever borrowed money online? What about from a bank? Or from a private investor?
If the answer is yes, you have a credit score. That is, your borrowing and repayment history.
Sometimes referred to as your credit rating, lenders will use this information to decide whether or not to lend to you. If a lender is willing to lend money to you, your credit score will help them determine your credit limit as a borrower, the interest rate they will offer you, and any other applicable conditions.
Simply put, your credit score is your reputation as a borrower. So it’s important to maintain a good credit score to ensure you can borrow necessary money now and in the future.
But what is a good credit score?
Anyone who has ever opened a line of credit will have a credit report. A credit report is an information statement about your credit activity and current credit situation. Most credit reports will show your credit score as a number between 0-1200 or 0-1000 depending on the scoring model being used. As a rule of thumb, the higher your number within the model, the better your credit score.
When considering scores within the 0-1200 model, any number above 661 is considered ‘good’, and a score above 853 is considered ‘excellent’. When considering scores within the 0-1000 model, any number above 540 is considered good, and a score above 690 is considered excellent. According to credit reporting company Equifax, the average credit score among Australians is 855. So, as a country, we are doing pretty well.
What a good credit score means is that you are a responsible borrower. This means your chances of being approved for a loan are increased. However, lenders also take into account other factors affecting individuals including employment, income, and debt when deciding whether to lend to someone.
What products require a good credit score?
Although many factors are taken into account when a credit application is being assessed, if you have a good credit score, you will find it easier to get approved for:
- Personal Loans
Loans for things like debt consolidation, home renovations, and personal lines of credit will take into account your credit score. - Car Loans
As these are typically secured loans, they are less risky for lenders. But some lenders may still only consider borrowers with good credit scores. - Credit Cards
A good credit score will enable you to obtain credit cards with higher limits. - Home Loans
The higher your credit score, the more willing home loan providers will be to work with you.
What is a bad credit score?
The exact range for a bad credit score in Australia will depend on the scoring model being used, but usually a number between 300 and 500 is considered a bad credit score. Lenders will regard individuals with higher scores to be lower risk and individuals with lower scores to be higher risk.
How could a bad credit score affect me?
A bad credit score can significantly affect your credit report. Basically, it tells lenders that you have a less than ideal reputation, or even a very poor reputation, for borrowing money. Which I think we can agree does not sound like someone to trust with a loan.
These are just some of the ways a bad credit score can affect you:
- Higher Interest Rates
Typically, the interest rates that are advertised by lenders are only available to borrowers with ‘excellent’ credit scores. An additional 1-3% will usually be added for borrowers with ‘very good’ credit scores, and approximately 3-6% for borrowers with a ‘good’ credit score. - Loan and credit application rejection
With a lower credit score, your loan and credit applications will typically be subject to more rejections. Sometimes you might not even meet a lender’s minimum requirements and will receive an instant rejection. - Renting Difficulty
As if finding a place to rent isn’t hard enough, if you have a bad credit score you could be shooting yourself in the foot even more. Landlords will often run a credit check to determine if they think you will be able to pay rent on time. If you’ve had a history of late payments, they will be less likely to rent to you. - Paying higher premiums
If you have a poor payment history or outstanding debt, chances are high that most insurance companies will charge you a higher premium than others.
What actions will decrease my credit score?
Missing monthly repayments, paying monthly repayments late, defaulting on payments, entering debt agreements, declaring bankruptcy, and frequent credit enquiries are just some of the aspects that contribute to a bad credit score. Some of these factors can stay on your credit report for more than seven years, but less severe factors will usually be removed after two or five years.
Something important to note is that even after you pay off an outstanding bill, it will remain on your report for another five or seven years.
How can I increase my credit score?
If you have a bad credit score, all is not lost. Your credit score is not a permanent number and, through consistency, it is possible to improve your credit score and become an ideal borrowing candidate. Some positive behaviours you can undertake to improve your score include:
- Paying off old debt
The first thing you need to do is pay off any outstanding debt and settle your accounts. Paying off debt can significantly improve your credit score, but it also lowers the amount of interest you will need to pay over time. - Apply for short term loans
With a bad credit score, you can still apply for short term loans. Choosing to repay them on a regular basis, and not missing any payments, will boost your credit score. - Pay on time, every time
Consistency is key when it comes to a good credit score. Paying bills on time, every time, will stand out in your payment history and make lenders more comfortable lending to you. A key way to make sure you don’t miss these payments is to set up an autopay mechanism for recurring payments. You can also discuss easier repayment options with credit providers and adjust your due dates if multiple bills are culminating on the same day. - Check your credit report regularly
By analysing your credit report you will be able to identify the specific factors that are bringing down your score. In addition, if you see any errors showing up on your credit report, it is important to dispute them to get them taken off quickly and improve your score. - Don’t apply for multiple credit products at the same time
If lenders can see you have been stretching yourself thin by applying for multiple credit products simultaneously, they will be less likely to lend to you. In addition, if you apply for multiple loans or credit cards at the same time, this can generate several hard inquiries on your credit report and bring your score down. As a good rule of thumb, if you have been rejected for a loan, you should wait two weeks - two months before applying again.
How to access your credit score
Individuals are entitled to receive a number of free copies of their credit report every 3 months. There are companies that advertise a fee to provide a copy of a credit report. Before jumping in for those services, it may be advisable to consider your free options first.
The Federal Government MoneySmart website provides information on where to access a free copy of your credit report. This information includes the contact details for several credit reporting agencies.
Looking for a business loan? Get the best deal available with JADE Finance
Although good credit generally means lower rates, JADE Finance has a variety of services available, regardless of credit score.
Based on our realistic view, we completely acknowledge certain events can occur that negatively impact a business’ credit rating. Our database of banks and lenders is extensive and we have the knowledge and expertise to connect you with the ones that provide loans to individuals and businesses with a variety of credit scores.
So, even if you have had a loan application rejected by a bank or lender, our loan brokers are happy to discuss the options available. Get in touch to see how we can help you by calling 1300 000 008, or securing a Free Quote.
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