Curious as to why your credit rating (also known as a credit score) is so low? Or just want to understand what factors can impact your credit rating? Well, fortunately, we’ve come up with 5 top tips to improve it!
“The higher your credit score, the easier it is for you to obtain loans.”
For those who don’t know what a credit score is, it’s a number ranging from 0 to 1200 (depending on the credit reporting body) that reflects a person’s credit worthiness. The higher your credit score, the easier it is for you to obtain loans or acquire low interest rates on credit cards and loans. On the other hand, a low credit score makes it more difficult to obtain loans and may result in higher interest rates. Find out how you can improve your credit score by understanding these five simple tips.
Master the Pieces of the Pie
Firstly, you must understand the phrase ‘mastering the pieces of the pie’. It is essential to understand what aspects of your credit behaviour are resulting in a low score. Your credit score is affected by five main “pieces”. They are credit usage, credit history, length of credit history, total/type of accounts and enquiries.
For every credit facility, there is a limit on the amount of funds you can use. Just say you have a limit of $2000, and you’re using $1900 and not paying it down, that’s considered to be high usage, which impacts your credit score. In the eyes of a lender, that could be a red flag. A good way to manage your usage is to keep it under 10% by the end of every month. This looks good when you want to secure further credit.
Your credit history contains information regarding your current credit facilities, any bankruptcies, defaults, court judgments and credit enquiries. It is your responsibility to repay credit owed to banks and other financiers. If you miss a payment or pay it late, it can be recorded on your credit file which can negatively impact a future loan application. However, continuously paying on time can improve your score and credit providers may be lenient if you have only missed one payment.
If you want to access your credit report, contact a credit reporting bureau and request it, as you should be able to get one free report per year. Who knows, maybe you’ll be positively shocked by the results!
Length of Credit History
The algorithms when running a credit report calculate the length of time a credit file has been established and the average time credit facilities have been open. The longer a credit file has been established and credit facilities have been open, the better a credit score is at improving the chances of obtaining credit. For people who are new to credit, this may negatively impact their ability to obtain loans as their file and accounts have only been established for a shorter period.
Total/types of Accounts
Is it good to have multiple credit facilities? Having multiple and diverse accounts such as a personal credit card, car loan and home loan may actually improve your credit score. If you are up-to-date with your accounts and manage them correctly, this looks good when a credit provider assesses your report. If you have an excessive amount of one type of credit facility (say multiple credit cards) it may have the opposite effect.
Be cautious about how regularly you apply for new accounts as they will be recorded as enquiries on your credit file.
A credit enquiry is recorded on your credit file when you make an application for credit. Contacting multiple credit providers at the same time can put your credit score at risk, as they track all enquiries you make and it may be seen as excessive. Spacing each enquiry out and only applying for credit when you really need it will lower the risk of decreasing your credit score.
Putting the Pieces Together
Understanding your credit score and the ‘pieces of the pie’ that comprise it are essential for you to access credit and ensure you get the best interest rate possible. Controlling credit usage will illustrate your discipline to a financial institution, and having a sound credit history will assure creditors that you represent a low risk. A long and consistent credit history will prove you have a considered approach to your finances, which will be reassuring to creditors. Finally, limiting the number of credit enquiries you make will give lenders confidence that you only use credit for the important things in life. If you do have a low credit score due to a poor or no credit history, there are lenders that may be able to assist you, such as Finance One (www.financeone.com.au).
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 legal, financial, taxation or other advice 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.