Your credit score is often calculated to assess how creditworthy you are, before banks and businesses extend credit for a mortgage, personal loan or credit card. Here’s how to ensure your credit score is accurate and the best it can be.
Credit scores are a hot topic in Australia, because there is upcoming legislation that will change the information available to banks and lenders when they assess a borrower’s creditworthiness.
“A credit score is a mathematical score [from 0 to 1000] based on personal and financial attributes around creditworthiness for a loan applicant,” explains Chris Irwin, head of Retail Credit Risk at Bank of Queensland (BOQ). “Generally, the higher the credit score, the better.
“It helps a lender decide whether to approve your request for finance – such as for car loans and credit cards: the dollar amount and the interest rate offered.”
Credit reporting bodies (CRBs) currently collect your personal information, as well as data on enquiries you make for finance, and any defaults or serious non-payment of debt. This is included in your credit report.
From 1 July 2018, the consumer finance industry will be able to adopt a more comprehensive reporting regime, whereby credit providers will be able to assess your debts held and repayment conduct, to get a more complete and balanced picture of your credit position.
Under the new legislation, credit reports will include current loans and credit cards held; when accounts were opened and closed; and your repayment conduct (up to a maximum of 24 months). Credit reports will also still include the date of any loan defaults, bankruptcy or court judgments. All this information is used to calculate your credit score.
“The conduct of a borrower on their existing loans will be included in the credit scoring, and should create a positive impact for many applicants,” says Irwin. “The credit limit or amount of the debt and your repayment conduct will be factored in, so if you have been paying your debts on time, it will be beneficial for you.”
One in four Australians fear their credit score could stop them from getting a new loan or credit card, according to a survey by finder.com.au. The big question is how you improve your credit score. Irwin shares his expert advice:
1. Pay your debts on time
Timely repayment of your debts is the best way to improve your credit score. Setting up direct debit payments and/or having a financial budget or plan are excellent ways to ensure you pay your debts when they are due. A fixed interest rate may help keep your debt repayments known and planned.
2. Manage your debt-to-income ratio
The ratio represents the total amount of debt compared with your total household income. Depending on the type of debt held, a high amount of debt can put pressure on your future ability to make repayments. Be mindful of whether your current or future income will meet your debt level.
3. Don’t shop around for debt
Only apply for credit when you need to, and for the amount required. If you apply to too many credit providers, it may appear that you are desperate to take on debt. It is perfectly acceptable to apply to two lenders for a home loan or car loan, and seek the best rate and offer. However, if you apply for multiple personal loans or credit cards, or often approach payday lenders, this behaviour may reduce your credit score.
4. Be wise with your credit cards
Credit card debt is an ever-increasing commitment for many Australians. It is crucial to manage this debt and make your monthly repayment on time. It is also important to not to exceed your card limit. If you are struggling with credit card debt, consider a financial budget to help keep control of your spending. ASIC’s MoneySmart website has a simple budget planner.
5. Be in the know
Simply being aware of your credit score is the easiest way of improving it. You can check your credit score on Credit Savvy, Credit Simple and GetCreditScore, and you can also request a copy of your credit report for free from the CRBs.
Check your credit report
Check your credit report for incorrect information, such as duplicate credit enquiries, incorrect amounts or unknown payment defaults. If some information is wrong, contact your credit provider or the CRB to have the information checked and corrected.
“If you have any documents to support your position, these should be provided to assist with fixing any error. The credit provider or credit reporting body must respond to you within 30 days,” says Irwin.
“If you still dispute the information on your report, you can discuss it further with a community legal centre or financial counsellor, the Financial Ombudsman or Office of the Australian Information Commissioner.”
For further information on credit scoring and consumer lending, CreditSmart is another great source of information.
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