September 12, 2017 How good is your credit rating?
To say your credit rating’s important is an understatement.
Interestingly, though, the majority of Australians have no idea what their credit score is.
If you happen to be in the ‘no idea’ camp, you’re not alone – you’re one of the 90 percent of people who don’t know what their credit rating is, according to Australia’s credit-reporting agencies.
Now, your credit rating isn’t something that’s typically top of mind until you need major finance.
By that I mean applying for a home loan, for instance.
Recent changes also mean there are now more considerations to take into account. In other words, there are now other things that can affect your credit rating.
If you pay your bills and credit card on time – every time – chances are you have nothing to worry about. If you’re regularly behind on your bills or payments, though, you may be undermining your ability to borrow what you need to buy your dream home.
Either way, I’d argue that it’s important to know where you stand. Better to know than have your head in the sand, in my opinion.
The good news is that it’s free to find out your credit score (see below) and, if it turns out that it’s not that great, there are ways you can improve it.
So, how good is your credit rating?
Let’s start with the vernacular
I’ll walk you through the terms you need to get your head around.
Firstly, there’s no difference between your ‘credit rating’ and ‘credit score’ – they mean precisely the same thing.
Here, your actual credit score will be a three-digit number.
Next, your ‘credit file’ is the repository where your credit history resides – this is held by private credit reporting agencies (more on that later) – which provide ‘credit reporting’ upon request.
Lastly, ‘default’ is defined as failure to fulfil a financial obligation and the term is used to refer to an overdue debt which has not been paid.
Checking your credit rating
It’s not that difficult, and you’re entitled to get a free credit report once a year.
In fact, independent credit-reporting agencies are required, by law, to provide them free of charge once every 12 months.
Beyond that, though, you’ll need to pay to get another report inside of a year. The three major reporting agencies are Veda, Dun and Bradsheet and Experian, and you can expect them to turn around your report within 10 business days.
What do they look at?
A credit report considers your payment history on any credit cards, home loans, personal loans, car finance, store finance and any other types of consumer credit you may have.
Credit-reporting agencies also keep an eye out for any late payments you’ve potentially made on your gas or electricity bill, for example, or, say, your phone bill – we’re talking instances where bills are more than 60 days overdue.
Any payments deemed as ‘late’ will incur a black mark on your credit report.
Breaking down the ratings
Credit scores range from zero to 1,200. The following five-point scale is taken from ASIC’s Money Smart website:
You are highly unlikely to have any adverse events harming your credit score in the next 12 months.
You are unlikely to have an adverse event in the next 12 months
You are less likely to experience an adverse event on your credit report in the next year
You are likely to experience an adverse event in the next year
You are more likely to have an adverse event being listed on your credit report in the next year
Now, to put things into perspective, based on a report by Veda in 2015, the average score for that year was 771, which is considered ‘very good’.
Scores over 833 were considered ‘excellent’, while scores below 622 predicted an adverse event – such as defaulting on a credit card – over the following 12 months thereafter.
To this end, Veda had identified up to 1.9 million people being at risk of default in 2016.
So, what’s changed recently?
There’s been a bit of noise in the media over the past couple of months about changes to credit ratings.
While it never used to be the case, you now only need to be 14 days late on a payment for either your credit card, home loan, personal loan, car loan or hire-purchase provider to pick up a black mark against your name.
Also, information that previously wasn’t recorded such as the date you opened or close a credit card or personal loan, your maximum credit limit and whether you made the minimum payment on time are now being recorded.
And that now applies to mortgages, investment home loans, car loans and store finance and the like, too.
Why your credit rating’s important
Let’s cast our minds back to the hypothetical of buying your dream home.
Your credit rating is what banks and lenders use to assess you when making you apply for a home loan.
It’s obvious, but, if your credit rating’s not in the best shape, there are a few potential implications.
The major ones being that you could get knocked back for a home loan, or the banks might put a cap on how much they’re prepared to lend you, based on your credit history.
It’s also important to take advantage of the free annual reports just to keep things in check, particularly given that credit-reporting agencies sometimes make mistakes.
What you can do to improve your credit score:
Okay, so you’ve discovered your credit score’s not that great. Try not worry, as there are few things you can do:
- Lower your credit card limits
- Consolidate multiple personal loans and/or credit cards
- Limit your credit enquiries
- Ensure your rent and bills are paid on time
- Pay your mortgage and other loans on time
- Pay your credit card off in full each month
As always, if you find yourself in a bit of a pickle with your credit rating and need to take control of your finances to get it healthy again, give me a shout.
Disclaimer: all information contained within this article is of a general nature. It does not take into consideration your personal financial circumstances. Please consult a professional financial adviser (just like us 🙂) when making a financial decision.