What a good credit score can get you
You may not realise it, but credit scores play an essential role in your finances. It’s a fact of life that you’ll probably need to borrow money or get credit at some point to pay for something outside your budget. Chances are, it won’t be just for big things like a house or a new car either. You’re actually asking for credit when you apply for:
- a mobile phone plan,
- a place to rent, and
- electricity or gas accounts for your home.
Landlords and service providers want to be confident that you’ll pay them what you owe on time. A good credit score helps to give them that confidence. It shows you have a good track record of paying your debts.
A good credit score can also help you to negotiate a lower interest rate or reduced fees on a loan. It’s important to understand that even a small difference in interest rates can make a BIG difference to your loan repayments.
For example, the average home loan in Australia is $388,100. If you borrow that amount at 5% interest over 25 years, you’ll pay $292,539 in interest over the life of the loan. But if you borrow the same amount at 5.5% instead, you’ll pay an extra $34,344 in interest! The extra half per cent interest doesn’t sound like much, but it has a massive impact.
How to get a good credit score
So, if credit scores are so important – how can you ensure yours is ranking well? Credit scores typically range from 0 to 1200, depending on the credit reporting agency. In this case, the higher your number, the better.
One of the easiest ways to get a good credit score is to pay all your debts on time. The two major issues that you want to avoid are late repayments, or missed repayments. Both of these situations harm your credit score big time. A bad credit score will see lenders and other credit providers usually do one of two things:
- reject your application (which will damage your credit score even further); or,
- charge you a higher interest rate.
You can take simple steps to avoid missing your repayments and damaging your credit score. For example:
- budgeting to make sure that you’re not spending more than you’re earning, and
- letting your credit providers know when you change your contact or bank account details. Doing this will ensure that you don’t miss any bills or direct debit payments.
Other ways that you can get a good credit score include:
- lowering your credit card limits. If you have a lower credit card limit, it reduces the amount of debt that you can rack up. It also reduces the risk that you won’t be able to afford your debt repayments.
- limiting your additional credit applications. Only apply for credit when you need it (and ideally, when you have developed a good credit score so that you can negotiate the lowest possible interest rate and fees).
How to build credit
It’s important to build a good credit rating as soon as you can. Of course, if you’re young and you’ve never had any type of credit before, you won’t have a credit history. That can be a ‘Catch 22’, because many credit providers will need you to have one to approve your application.
So how can you get a credit score in the first place? The answer is that it’s best to start small. You’ll be more likely to be approved without a credit history for smaller credit amounts like mobile phone plans or electricity accounts.
For example, if you currently live with someone who has the gas or electricity accounts in their name, see if you can transfer one or both of them into your own name. You might have to pay a security deposit to the service provider, but when you’re approved and you start making all your scheduled repayments on time, you’ll be on your way towards developing a good credit score. Your security deposit will also be refunded to you when you cancel the service, provided that you’ve made all your repayments.
1. Practise good credit habits
Practising good credit habits right from the start will help you to develop (and keep) a good credit score. Good credit habits include:
- avoiding or reducing your credit card debt. Interest rates on credit cards in Australia are three or four times higher than other forms of credit.
- taking advantage of interest-free periods and paying off your credit card debts in full each month.
- not exceeding credit card limits (you’ll usually be charged additional fees if you do).
- avoiding late fees by paying all of your bills on time.
If you currently have multiple debts, it’s also a smart strategy to consolidate them all into a single debt at the lowest possible interest rate. This lowers your overall repayments and it also makes your debts easier to manage. Instead of having to make multiple repayments regularly, you’ll only need to make a single regular repayment to cover all your debts.
2. Check your scores and reports
It’s important to check your credit score before you apply for any finance. You’re legally entitled to obtain this information. Lenders and service providers will also access your credit score as part of assessing your application.
If you haven’t checked your credit score recently, you may find that it’s changed. In 2014, the government introduced the comprehensive credit reporting system. Before this system was introduced, only negative information was reported by lenders to credit reporting agencies. For example, missed credit repayments or bankruptcy orders.
However, lenders are now required to also report positive credit history information. So, if you missed a repayment on your credit card or home loan three years ago but haven’t missed a payment since, it’s likely that your credit score will have increased. If it has, you’ll have increased negotiating power with lenders. There’s an old saying that ‘you don’t get what you deserve, you get what you negotiate’. That saying can apply to lenders, but it’s important to do your research as some providers will only offer fixed interest rates.
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Disclaimer: Of course, while we’ll always do our best to provide you with the information you need to thrive financially, we’re not debt counsellors, nor do we provide financial advice. Be sure to seek independent, professional advice that’s based on your individual circumstances before making any financial decisions.