Credit Scores and why they are important

Recent research by comparison service Choosi found one-third of Australians don’t understand the factors that impact their credit score.

But what are credit scores?

Lenders use a credit score (or credit rating) to decide whether to give credit or lend money and knowing this can help people negotiate better deals, or understand why a lender rejected them. A credit score is based on personal and financial information kept in a credit report and both can be accessed for free every three months so it’s worth getting a copy at least once a year. A credit score higher than 700 is considered very good, while scores under 625 are below average. If people have ever applied for credit or a loan, there will be a credit report about them. Credit reporting agencies such as Experian, illion and Equifax can provide a free credit report and different agencies can hold different information so people may have a credit report with more than one agency. Alternatively, people can get their credit score for free from an online credit score provider such as Credit Simple, Finder or Canstar.

Saving is the key

Nothing beats good old-fashioned saving. This means cutting back on the avo on toast and eating out, getting rid of debt, finding a high interest savings account and improving the credit score. This will help with loan approval and securing a good interest rate. Mortgage broker Phoebe Blamey, who is also author of The Happy Money Journey, said the greater understanding people had of money, the more control they had over the direction their life took. “When I started learning, I realised it has very little to do with how much you earn, and much more to do with how you invest and how you spend,” she said. Buyer’s agent Chris Gray said people should know their financial position. “Make sure you have a clear understanding of your current financial situation and credit score,” he said

Getting a better deal

“Review your credit history in detail and fix up any errors if need be. Improving your credit score could be as simple as paying bills on time and reducing debt.” A credit score is calculated based on what’s in a credit report such as the amount of money borrowed, the number of credit applications made and whether people pay on time. A higher score means the lender will consider people less risky. This could mean getting a better deal and saving money. A lower score will affect the ability to get a loan or credit. As well as personal information, a credit report will include credit products, repayment history, defaults on utility bills, credit cards and loans, credit applications, bankruptcy and debt agreements and credit report requests. If something is wrong or out of date, contact the credit reporting agency and ask them to fix it, which is a free service.

Time for improvement

Daniel Foggo, chief executive at lender Plenti, said people seeking a loan could also improve their chances by reducing their credit card limits, which would improve their credit score because lenders assumed they were borrowing the maximum, and shut down store cards or credit cards they no longer used. Beyond Bank national operations manager Sophie Scott-Young said simple things such as making sure people paid bills on time, made loan repayments on time, and not missed them would assist in lifting their credit score over time.