Your credit score is a crucial number in the financial world that demonstrates how well you handle money. For most banks and lenders, a higher score implies a lower likelihood of loan default. Therefore, having a high credit score may put you in a better position to negotiate lower interest rates, as lenders see you as a low-risk borrower.
Despite the significance of them in financial matters, many people tend to overlook this figure. However, understanding it can help you manage your money better and enhance your financial well-being.
If you’re curious to know more, this post addresses five common questions about credit scores, helping you understand their significance and impact on your finances.
1. How is a credit score different from a credit report?
Your credit report provides a detailed record of your credit-related activities, such as your payment history, outstanding debts, and credit inquiries. It is maintained by the three credit reporting bureaus in Australia, namely Equifax, Experian, and illion.
When you apply for any financial product, a lender typically reviews your credit report to learn more about your financial behaviour. Your credit score, on the other hand, is a numerical representation of the information available in your report. This may range from 0 to 1200, depending on the credit reporting agency. Lenders use this figure as a quick assessment tool to understand the level of risk you may pose as a borrower.
2. How is your credit score calculated?
Your credit score is calculated using a mathematical algorithm that assesses different factors from your credit report. While the exact formula may vary among credit reporting agencies, they all consider some common factors, such as:
- Your repayment history
- The length of your credit history
- The variety of your credit accounts
- Your debt-to-income ratio
- New credit applications
Understanding that both positive and negative financial behaviours impact your credit score is important. For instance, making timely loan repayments or paying your bills on time are examples of positive financial behaviour and are likely to boost your score over time. On the other hand, defaulting on your payments is a negative behaviour that could pull down your score.
3. How can you check your credit score?
Besides checking your credit score regularly, consider ordering a copy of your credit report from each of the three credit reporting bureaus at least once a year to verify the information on it. This simple step can help you stay on top of your finances and correct any errors on your credit report in a timely manner.
4. Does checking your credit score bring it down?
There are two types of credit checks – inquiries made by lenders called hard inquiries and inquiries made by you called soft inquiries.
Soft inquiries are not visible to lenders and don’t affect your score. On the other hand, a hard inquiry may cause a slight and temporary decrease in your credit score.
While a single hard inquiry may not result in much of a decrease, several hard inquiries in a short period may be a red flag for some lenders. Applying for multiple loans decreases your credit score temporarily and may also be considered a desperate measure, indicating financial trouble.
5. How long does it take to fix your credit score?
How long it takes to improve your credit score may vary according to the reason for the low score. If inaccuracies on your credit report caused the reduction, correcting this information can improve it. On the other hand, if it is low due to past financial mistakes or a limited credit history, the process may extend from several months to years.
In general, maintaining financial discipline and consistently making on-time payments over an extended period can lead to a better credit score. It’s crucial to note that information on your credit report can only be altered or removed if it is proven to be incorrect or false.
By Vidhu Bajaj,
Hashching Content Writer