Institutions that lend money such as banks, credit card providers, mortgage lenders, and finance companies use credit scores as a way to assess the credit worthiness of a person. A credit score evaluates whether the borrower can afford a loan, and it can also determine their interest rate, and their credit limit.
What is a good credit score?
A credit score is a number that ranges from 0 to 1200. In general, the higher the score you get, the easier it is for you to qualify for a loan and it may result in a better interest rate.
- 0- 509 (Below Average) If you get this score, it means that you are in an unfavourable situation (for example, subject to bankruptcy or court judgment). It is more likely that an adverse event will be recorded in the next 12 months.
- 510-621 (Average) Your score is in the bottom 21-40% of the credit active population. This suggests that adverse events will likely to occur for you in the next 12 months.
- 622-725 (Good) This score suggests it’s less likely an adverse event will happen that could affect your credit report in the next 12 months.
- 726-832 (Very good) Your odds of keeping a clean credit report are two times better than the credit-active population. Adverse events are unlikely to happen in the next 12 months.
- 833-1200 (Excellent) You’re in the top 20% of the credit-active population. It is highly unlikely that an adverse event would occur which could harm your credit report in the next 12 months.
How are credit scores calculated?
Lenders across Australia calculate your credit scores by using the information on your credit reports. These include:
- Your basic personal details – they will look into your age, the term of employment, address, previous address and driver’s license.
- Type of credit providers you have used in the past – Each lender, bank or financial institution has different risk levels.
- Credit enquiries you’ve made – Making multiple loan applications can lower your score.
- Default information – Personal or business credit reports such as unpaid debt and serious credit infringements can affect your score negatively.
- The amount of credit you have borrowed – Mortgages are seen as lower-risk than credit cards.
- Bankruptcy history – Any debt agreement or personal insolvency issues relating to bankruptcy will bring your score down.
There are websites that provide you with your credit scores for free such as, Creditsavvy, Getcreditscore, Creditsimple, Checkmyfile and many more. Results may vary depending on which credit reporting agency is used.
How to get a good credit score?
Your credit score can change over time depending on the information contained in your credit report. It’s very important that you manage your finances well. There are some things you can do to make sure your score remains high.
- Pay your mortgage and other loans on time
- Pay unpaid credit card debt or loans
- Limit your credit enquiries
- Lower your credit card limits
- Don’t apply for credit you don’t need and can’t pay for
- Make your monthly repayments on time
Lenders decide if they will lend money to you based on your credit score. Knowing your credit score and maintaining a good reputation in your credit report can increase the possibility of getting any loans such as home loans, car loans and investment loans.
Thankfully, there are a number of ways you can do to improve your rating and increase your chances of a mortgage approval:
Five useful tips to improve your credit rating
1. Pay your utility bills on time
Your ability to pay the power bill on time can affect your credit rating.
It might seem as though your phone and power bills have little to do with the home loan approval process, but as Veda pointed out, failing to pay for your utilities can negatively affect your credit rating. A debt totalling more $150 or more, which is at least 60 days overdue, can impact your rating under the Privacy Act 1988.
What's the key takeaway here? Simply put, pay your utility bills when they're due. Set aside time each month to settle your outstanding debts and leverage technologies such as internet banking and automatic payment systems to ensure your accounts are paid off before they harm your credit report.
2. Always keep on top of your loan repayments
A proven ability to make loan repayments on time can boost your credit rating.
Defaulting on a loan or missing a payment are perhaps the two things that will have the largest impact on your credit rating and discourage banks from approving your home loan. Many people struggle to consistently meet their financial obligations, with Veda finding that around 2.1 million Australians will be at risk of defaulting on their credit at some stage in the next year.
Fluctuations in your personal finances are inevitable and sudden changes can put pressure on your ability to make loan repayments. However, for the sake of your credit rating, it's vital that you do so. Establish a budget that allows for moments of hardship and set yourself payment due date reminders on digital and physical calendars to ensure you always make your loan repayments on time. Our home loan calculator can help you find out the minimum repayment of your loan.
3. Limit your number of credit applications
Credit cards are useful tools, but only apply for a new one when you absolutely need it.
Provided that you always pay it off on time, regularly using a credit card is a great way to start building a positive credit rating. However, applying for multiple lines of credit can actually harm your rating and make you less attractive to lending institutes.
Demonstrate your reliability as a debtor by only signing up for new avenues of credit when it's absolutely necessary.
4. Consolidate your debt
Consolidating your debt into a single loan can help you manage your finances more effectively.
If you've got yourself into a position where you have multiple loans to pay off at high interest rates, Veda suggested that you can simplify things by consolidating your debt into a single loan. Doing so could help cut the amount of interest you pay while also reducing the amount of admin time necessary to keep track of the repayments.
If consolidation isn't an option, you may need a different approach. It's usually a good idea to tackle the loan with the highest interest rate first, though this will depend on the size of your debt, late fee penalties and other factors specific to your circumstances.
5. Think about your spending patterns
Reshaping your spending habits is the ultimate way to take control of your credit rating.
The most effective way of improving your credit rating is to reconsider your relationship with debt. While making a complete overhaul of your spending patterns overnight is impossible, there are incremental steps you can take towards achieving healthier financial behaviour.
A combination of living within your means, reducing the number of luxury purchases you make and sticking to a strict budget can help you stay on top of your loans, improve your credit rating and ultimately increase your chances of receiving a mortgage approval.