Credit scores are numbers ranging from 0 to 1200 (depending on the credit reporting agency) that reflects a person’s creditworthiness. The higher your credit score, generally the easier it is for you to obtain loans. An excellent credit score can also work in your favour to acquire low interest rates.
On the other hand, a low credit score may indicate to the lender that you might be riskier to lend to — perhaps you’ve defaulted on loans or paid your phone bill late a few too many times. More risk for the lender means the borrower may end up with a higher interest rate, less flexible loan terms, or struggle to get approved for finance!
Master the pieces of the credit report puzzle
When it comes to your credit report, many pieces of the puzzle make up your overall credit score. Understanding what aspects of your lending behaviour have led to your bad credit score is essential.
The five main ‘pieces’ that affect your credit score puzzle are:
- Credit usage.
- Credit history.
- Length of credit history.
- Total/type of credit accounts.
- Credit enquiries.
For every credit facility you have open (for example, home loans or a personal loan) there is a limit on the amount of funds you can use. Let’s say you have a limit of $2,000, and you’ve used $1,900 without paying it down — that’s considered to be high usage, which can impact your credit score. In the eyes of a lender, borrowers who have ‘maxed out’ their credit limits.
A good way to manage your usage is to keep it under 10% of your credit limit by the end of every month. This can look good when you want to secure further credit.
Watch out for:
If you’re struggling to keep your usage under 10% and think increasing your limit will help with the figures, think again. While a higher limit may help keep your usage low, your total credit limit will be assessed if you’re applying for a loan or credit. If this amount is high, it can reduce your ability and chances to borrow.
Your credit history contains information regarding your current credit facilities, any bankruptcies, defaults, court judgments and credit enquiries. It is your responsibility to repay debts that you owe to banks and other financiers. If you make late payments, it can be recorded on your credit file, which may negatively impact a future loan application.
However, continuously meeting the minimum payment on time and in accordance with your contracts can improve your score, and providers may be more lenient if you have only missed one payment.
Check your credit report. Contact a credit reporting body if you want to access your report and check your score. Credit reporting bodies are legally bound to provide you with a free copy of your credit report once every three months.
While it’s impossible to undo past mistakes, understanding what negative information exists on your file will help identify what has negatively impacted your score so that you can adjust your behaviour in the future.
Watch out for:
If you notice anything on your file that must be corrected, make sure you look into it. Sometimes incorrect information is not your fault, but it can still have a detrimental impact on your credit score. For example, something as simple as a mismatch of your personal details can place you at higher risk of damaging your credit score. Contacting the credit reporting agency directly is one of the few quick-fix efforts that can positively impact your file.
Did you know
Identity theft can seriously cripple your credit score? Conducting a free credit score check and accessing a copy of your credit report can help you identify any suspicious behaviour on your file. A routine check for credit inquiries that you didn’t make, new credit lines added, or changes to your information can help protect you against identity fraud.
How long you’ve had your account open with each credit provider
When running a credit report, algorithms calculate the length of time a credit file has been established and the average time credit facilities have been opened. All else remains constant, the longer a file has been established and the longer facilities have been open, the better a credit score generally is. This is because there is a track record regarding your behaviour.
Maintaining a good, long consistent credit history can help increase your score (consistently paying bills on time can go a long way).
Watch out for:
Applying for new loans for the sake of establishing your history could be a risky move. Before making a credit application, ensure you can keep on top of the repayments. Missed payments on credit products can erode your overall score.
Total/types of Credit Accounts
Finding the right amount and types of facilities to maintain is a balancing act. A diverse range of credit products (such as a credit card, car loan, and home loan) may support a good credit score.
If you are up to date with your accounts and manage them effectively, this can look good when a credit provider assesses your credit report. If you have an excessive amount of one type of credit facility (say multiple credit cards), it could have the opposite effect. Lenders might wonder why you need multiple types of the same credit product. Sometimes, when someone has multiple forms of consumer credit, it’s because they’re taking out a new one to pay off another one. They can get caught in a dangerous unpaid debt trap that’s hard to escape.
Maintain a variety of credit facilities in accordance with each loan agreement or credit contract, respectively. But ensure you keep on top of these otherwise, you could negatively impact your score.
Watch out for:
Be cautious about how regularly you apply for new accounts, as they will likely be recorded as credit enquiries on your file, which could decrease your chances of being approved.
A credit enquiry is recorded on your file when you make an application for credit, such as for a personal loan. Contacting multiple providers at the same time can put your credit score at risk, as they are likely to track all enquiries you make, and it may be seen as excessive.
Limiting the number of times you apply for new credit gives lenders confidence that you only use credit for the important things in life. This includes applying for slight increases to your credit card limit.
Spacing each enquiry out and only applying for credit when you really need it will hopefully lower the risk of decreasing your score and help you on your journey to an excellent credit number.
Putting the pieces together to help improve your credit score
Understanding your score and the ‘pieces of the puzzle’ that comprise it are essential for helping you to access and improve your credit score. Controlling usage can illustrate your discipline to a financial institution, and having a sound history can assure creditors that you represent a lower risk. A long and consistent history will hopefully prove you have a considered approach to your finances, which should reassure creditors.
Avoid credit repair companies!
In the pursuit of a good credit score, it can be tempting to fall for the promises of credit repair companies who claim that they can ‘fix’ your score. Many credit repair companies claim that they can remove information on your credit report that negatively impacts your score. Unfortunately, no businesses can legally remove negative information from credit reports if it is correct information — if a credit repair company claims to, that’s a big red flag.
Finance One has helped many customers in their pursuit of financial freedom. Personal or business finance doesn’t need to be out of reach while you work to improve your credit score. In fact, in some cases, accessing a loan to make your finances more manageable is the ticket to breathing room in your budget. Contact us today to understand how we can help improve your credit score.Apply Online Now
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Disclaimer: The information above is of a general nature only and does not consider your personal objectives, financial situation or particular needs. You should consider seeking independent advice regarding your legal, financial, taxation or other needs, to check how the information relates to your particular circumstances. We do not accept responsibility for any loss arising from the use of, or reliance on, the information. All loan applications are subject to normal lending criteria. Fees and charges payable. Terms and conditions apply.