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? We share our 5 top tips on how to help improve your credit score.
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, acquire favourable terms or low-interest rates on credit cards and loans. 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 they might struggle to get approved for finance at all!
With our top 5 credit score improving tips on your side, you’ll hopefully be well on your way to rectifying your credit history and ultimate creditworthiness!
Master the pieces of the credit report puzzle
When it comes to your credit report, there are many pieces to the puzzle that make up your overall credit score. It is essential to understand what aspects of your credit behaviour result in a bad credit score. Your credit score is generally affected by five main “pieces”. They are:
1. credit usage;
2. credit history;
3. length of credit history;
4. total/type of credit accounts; and
5. credit enquiries.
For every credit facility (for example, a credit card or line of credit), 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, that could be a red flag.
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 credit that you owe to banks and other financiers. If you make late payments, it can be recorded on your credit file which maynegatively impact a future loan application. However, continuously paying on time and in accordance with your credit contracts can improve your score, and credit providers may be more lenient if you have only missed one payment.
Keep in mind that telecommunication, internet and utility bills are also recorded on your credit file. Paying your bills in full and on time helps to build a good credit score.
Check your credit report. Contact a credit reporting bureau if you want to access your credit report and check your credit score. You should be able to get one free credit report per year. Who knows, maybe you’ll be positively shocked by the results! If you’re shocked by the results because your credit score is so bad, try to improve your score before applying for credit.
Watch out for:
If you notice anything on your file that seems incorrect, make sure you look into it. Sometimes errors are recorded that can be detrimental to your credit score. These can usually be easily fixed by communicating with your credit provider or the credit reporting bureau.
Length of Credit History
When running a credit report, the algorithms calculate the length of time a credit file has been established and the average time credit facilities have been open. All else remaining constant, the longer a credit file has been established, and the longer credit facilities have been open, the better a credit score generally is. This is because there is a track record regarding your behaviour. Think of it like trying out a new restaurant; if they’ve just opened, there’s no way for you to know what they’re going to be like — similar to how credit providers may not be able to tell if you’ll pay your loans and bills on time if you have a short history. For people who are new to credit, this may negatively impact their ability to obtain loans as their file and accounts haven’t been open long enough to prove their track record.
Maintaining a good, long and consistent credit history can help to increase your score.
Watch out for:
Applying for credit for the sake of establishing your history might be a risky move. Be sure you can keep on top of the repayments and bills consistently and in accordance with your contracts.
Total/types of Credit Accounts
It is a balancing act to find the right amount and types of credit facilities to maintain. 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 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 may have the opposite effect. It could raise red flags, and 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 an old one. They can get caught in a dangerous 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. 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.
Putting the pieces together to help improve your credit score
Understanding your credit score and the ‘pieces of the puzzle’ that comprise it are essential for helping you to access credit and ensure you get the best interest rate possible. Controlling credit usage can illustrate your discipline to a financial institution, and having a sound credit 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 be reassuring to creditors. Finally, limiting the number of credit enquiries you make may 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, some lenders may be able to assist you, such as Finance One.
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.