What is a credit score?
A credit score is a tool used by lenders to assess the risks associated with lending an individual money. By understanding how your credit score is calculated, you can take more control and negotiate better deals, or understand why a lender rejected your application.
You can access a copy of your credit report and credit score, annually and at no cost. It is important to check the information on your credit report to ensure it is both accurate and up to date. This is particularly relevant for people who are credit active and for younger people seeking to establish themselves.
How is my credit score calculated?
An individual’s credit score is based on the information contained in their credit report such as:
- The amount of money a person has borrowed
- The number of applications for credit made by a person
- Whether that person pays their bills and debts on time
Your credit score will either be between zero and 1,000 or zero and 1,200 depending upon the credit reporting agency. The higher the score, the less of a risk you are seen to be. A higher score also gives you the ability to negotiate better deals with your credit providers. On the other hand, a lower score will affect your ability to obtain credit.
What does a credit report look like?
A credit report contains personal information such as your full name, date of birth, address and drivers licence number. It also lists the type of credit products you have held in the last two years, the number of applications you have made, the name of the credit provider and your credit limit and any loans you have guaranteed.
The report then details your repayment history for each of the credit products you have held in the preceding two years. This will include repayment amounts, when payments were due, how often you made those payments and whether they were paid by the due date. The report will also list all missed payments that were not made within 14 days of the due date.
Non-payment of a debt may result in your credit provider lodging a default on your credit report, which will reduce your credit score, however they must notify you before the default is lodged. To be able to lodge a default, the debt amount must be $150 or more, over 60 days past the due date for payment and the credit provider must have requested payment from you either over the phone or in writing. The credit provider can also lodge a default if they are unable to contact you. This is known as a ‘’clear-out’’.
A payment default stays on your credit report for five years, or seven years in the case of a clear-out. In addition to payment defaults, the report also includes any bankruptcies or debt agreements, court judgments, or personal insolvency agreements in your name.
Can I fix an error in my credit report?
It is important to check your credit report, because just like anything else, it may contain mistakes that could impact negatively on your ability to access credit. Importantly, check that the loans, debts and any adverse information listed all belong to you. Also check that that your name, address and date of birth are correctly recorded.
If any of the information is incorrect or out of date contact the credit reporting agency and request that they correct the error, which when verified, they will do free of charge.
A credit reporting agency cannot remove adverse information unless they are authorised to do so by the credit provider because it was recorded in error.
How can I improve my credit score?
The first thing to do is pay your bills and loan repayments on time. Each time you are late with a payment (based on the criteria above), your score will go down, so if you are finding it difficult to keep up with your payments, speak to your credit provider promptly and seek a formal extension of time to pay. Reputable credit providers will always listen to genuine requests for assistance and by speaking with your creditors, you will be more likely to avoid a default being recorded on your credit report.
Don’t apply for credit unnecessarily. Each time you apply for credit this is recorded in your credit report and this reduces your credit score. Do your research before you submit an application and only submit an application with your preferred credit provider.
Make sure your name is on the account for the bills you are paying. As long as you pay on time you benefit from the uplift in your credit score.
Finally, take charge review your credit report regularly. This is the most effective method of understanding your credit score. It also enables you to identify and fix any errors in the report before you make an application for credit, enabling you to borrow with greater confidence and negotiate better deals designed to save you money.
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