A credit score is a number that represents your creditworthiness. Lenders look at your credit score or credit rating, available on your credit file, to determine whether, and how much, they should lend to you, if at all.
In short, your credit score sums up how good you have been financially – drawn on the basis of your financial history, thus, enabling lenders to decide if they could take a risk on you or not.
Your credit score reflects every single aspect of your finances – any unsettled debts, loan applications, missed repayments or utility bills, stay on your credit file for years, bringing down your credit score significantly and impacting your chances of home loan approval adversely.
In the following lines, we will explain to you how exactly credit scores work, and what you can do to maintain a good credit score.
Understanding credit score and credit report
Closely associated, while your credit report is a record of your credit information, such as repayment history, payment defaults, loan enquiries, pending credit, etc., maintained by a credit rating agency, your credit score is a number or rating assigned to your credit report by a credit agency such as Equifax.
Lenders rely on your credit score heavily, to judge how much risk you pose to them as a borrower.
How is credit score calculated?
Credit reporting agencies collect your personal and financial information to prepare your credit report, which is used to calculate your credit score. Following factors affect your credit score or rating:
- Personal information (age and location)
- Amount of Credit
- Any payment defaults (mortgage repayments or credit card)
- Credit applications made by you and credit enquiries made by lenders on you
- Any insolvency agreements or proceedings
How do I check my credit score?
It is possible to get your credit report online on websites such as Equifax by requesting a copy of your credit file, free of cost, once every twelve months.
With the following websites, you can check your credit score, for free:
Note that the results could vary according to the credit reporting agency used. It makes sense to use a couple of these websites for a better overview.
Did you know that 30% of people who pulled out their credit reports, found mistakes in it, according to a research report published in the year 2013 by the Office of the Australian Information Commissioner?
Thus, it is recommended to pull out your credit report before you apply for a home loan and review it thoroughly. If you see any discrepancies, dispute them immediately to improve your credit score and your chances of borrowing.
What does my credit score mean?
Your credit rating or score is a number between zero to 1,000 or 1,200, depending on the credit reporting agency used. This number is then placed on a five-point scale to help lenders ascertain your creditworthiness or the risk in lending to you.
Excellent, very good, good, average and below average, are the five credit bands on the scale. An ‘excellent’ rating denotes you are highly unlikely to default in the next 12 months, and ‘below average’ signifying a high likelihood of default in the next 12 months.
In general, maintaining a credit score of 740 and above increases the probability of your mortgage application being approved manifold.
Checking your credit score does not bring it down!
Credit checks are of two types – enquiries made by lenders, called hard enquiries, and enquiries made by you, called soft enquiries. While hard enquiries are recorded on your credit file for five years, soft enquiries do not affect on your credit score.
What can I do with a good credit score?
By now, we all know that higher your credit score, the higher is your creditworthiness. You might also be aware that your credit rating impacts your credit limit as well as the interest rate on your home loan.
In general, an Equifax Score over 622 and an Experian credit score over 625 is considered good. Of course, the higher your credit score the better.
Here’s what you can do with a good credit score:
- Lower interest rates – Negotiate a lower interest rate on your home loan and car loan, because your interest rate is directly linked to your credit band (Use this repayment calculator to see how much you can save with just a few points slashed on your interest rate).
- Ask for a credit card upgrade – If you are regular with your credit card payments, with a high credit score, you can request a lower interest rate and better rewards.
- Lower insurance premium – Yes, some of the insurance companies offer you lower premiums if you have a high credit score.
Getting a good credit rating
If you have a phone connection, or a credit card, or a mortgage, you also have a credit file that is the repertoire of your financial history. Also, if you have ever missed a utility payment, made too many enquiries for a home loan or defaulted on your mortgage, it is going to show on your credit report, bringing your credit score down.
If you intend to buy a home soon, taking advantage of the low-interest rate home loan deals, here are a few hacks to improve your credit score:
- Limit the number of credit enquiries/applications
- Pay your rent and utility bills promptly
- Make your mortgage repayments and other credit repayments on time
- Lower your credit card limits
- Pay your full credit card bill every month on time
- Give up the extra credit cards (Click here to know how too many credit cards can affect your borrowing capacity)
- Be in good company; having a joint bank account or a joint mortgage with a person with bad credit history can affect your credit score adversely
- Don’t move your house too often; having the same address for a year can boost up your score
- Being on the electoral roll helps
Here’s an easy to remember infographic that will help you improve your credit score.
Your credit score is an important factor that helps lenders decide whether to lend to you or not. Checking your credit score puts you in a stronger position to negotiate a better rate that can save you thousands of dollars in the long run. We also suggest that you compare mortgage rates online to get the best deals in the market.
Offering home loan deals from over 60 lenders across Australia, HashChing taking the legwork out of your home loan, with expert brokers to address your home loan queries online, free of cost.
By Vidhu Bajaj
HashChing Content Writer