UNDERSTANDING CREDIT SCORES

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Tom Carstein  is a Financial Adviser who specialises in risk management. Tom can be contacted via email  tom@ambleside.net.au

Tom Carstein is a Financial Adviser who specialises in risk management. Tom can be contacted via email tom@ambleside.net.au

13 September 2019

There were a number a changes to lending practices following the Banking Royal Commission, including application processes and background checks. In this article I will cover the basics of credit scores and provide some tips on how to keep a healthy score.

WHAT ARE CREDIT SCORES?
Credit scores are a system that lending institutions use to determine the risk of lending you money. This score helps them determine if they will lend you money at all, how much to lend and in some cases what interest rate to charge. The score is a number between zero and 1,200 (or zero and 1,000 depending on the reporting agency used). The higher your score the better, and most scores are between 300 and 850. A good score is 500 or higher.

The number places you in one of five categories:

  • Excellent - Highly unlikely to have any adverse events harming your credit score in the next 12 months

  • Very good - Unlikely to have an adverse event in the next 12 months

  • Good - Less likely to experience an adverse event on your credit report in the next year

  • Average - Likely to experience an adverse event in the next year

  • Below average - More likely to have an adverse event being listed on your credit report in the next year

WHAT AFFECTS A CREDIT SCORE?
The obvious such as defaulting on a debt will lower your score, but there are several other lesser know activities that will have an impact. These include:

  • Making Multiple Applications for debt (for example credit cards, home loans, personal loans, store cards). Even if you don’t proceed with an application this can lower your score. This includes refinancing your home loan or balance transferring credit cards.

  • Late or Missed Repayments. Although late fees will apply and many companies will let you make catch up payments your credit score will also be affected.

  • Changing Limits on existing loan or credit accounts Each time you apply for a credit card, a credit enquiry can be recorded on your credit file by the lender. These credit enquiries stay on your file for five years and can impact your score.

  • How can I view my Credit Score? You can get a credit score from a number of online providers and best of all it is free. These can be found through Google or the ASIC MoneySmart website.

The application process is fairly simple and you will need to supply your address (you must have lived there for longer than three years), mobile number and identification (drivers license, medicare card or passport).

CAN YOU IMPROVE A CREDIT SCORE?
Credit scores change from month to month but it can take a long time to repair a bad score. Negative information can stay on your report for up to seven years but lenders tend to pay more attention to recent information. Actions that will improve your score include:

  • lowering credit card limits

  • consolidating multiple personal loans and/or credit cards

  • limiting applications for credit

  • making repayments on time

  • paying rent and bills on time

  • paying mortgage and other loans on time

  • paying credit card off in full each month

If you would like any more information on credit scores, or help to request a credit score please don’t hesitate to contact us. The ASIC MoneySmart website has some great information at www.moneysmart.gov.au/borrowing-and-credit/borrowing-basics/credit-scores

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