The lending market is extremely competitive at the moment, and with interest rates rising day by day, making sure you put your best foot forward by having a great credit score in your loan application is essential to ensure you can have access to the finance you need to achieve your dreams and goals.
Our very own Marissa Schulze was joined by Pasha Mehr, Principal Lawyer at Credit Repair Solicitors to discuss all things credit reporting and share their top tips to help you improve and maintain a good credit score!
What is credit reporting?
To provide you with a clear understanding of your credit score, why it is important and how it impacts your ability to obtain the right finance we must first talk about your credit report.
A credit report is very similar to a health check, in the sense that it is conducted to gain insight and establish the “health” condition of your finances. It provides an objective assessment of your creditworthiness, affecting whether banks perceive you to be a risky or safe borrower when they assess your loan application.
Are there different types of credit reports?
Yes! Before we head into discussing your credit score, it is very important that you understand the different types of reports available.
Although your credit reports should all tell the same story and paint an accurate picture of your financial health, there are three main types of credit reports you can access:
- Third-party sourced credit reports: which provide a very general overview of your financial health and can often be accessed through online websites
- Free credit reports: which you can access for free 3 times per year from a credit reporting body (such as Equifax, Experian, or Illion) to obtain a clearer picture that almost resembles the one banks and lenders can see, and
- Comprehensive credit reports: which banks and lenders use to obtain the entire picture of your financial health. These can be sourced for free on your behalf by our friendly team of experts at Rise High!
These can all help you gain clarity on the condition of your finances and help you identify critical areas that require attention or have the potential for improvement. Ultimately, the goal will be to present you in the best light to your future lender by optimizing your credit score!
What is a credit score?
So, what is your credit score? As mentioned earlier, your credit score is a number that indicates how safe or risky you may be for a bank as a borrower. It is a snapshot lenders use to learn more about you and gauge the level of trust they can place in your ability to repay a specific loan.
Your credit score is affected by multiple factors and can change based on things like having healthy financial habits (paying your bills on time) or choosing to use financial products and services like credit cards or payday lenders.
What is a good credit score?
Excellent question! Generally, your credit score is measured between 0 – 1200. The closest you stand to the 1200 mark, the better your credit score will be, which then opens you up to a variety of lenders and better interest rates as a result.
When it comes to answering what a good credit score might be, the magic number seems to stand above the 750 mark. Although policies vary amongst lenders, a credit score standing between the 750 and 1200 mark is considered an excellent credit score.
Anything below the 400 mark is considered to be in the “red zone” and should be avoided. Lenders can often charge risk fees, and higher interest rates or deny your application altogether if your finances are found to be sitting within these dangerous zones.
Is it important to keep an eye on your credit report?
Absolutely! Just like you would normally have health checks conducted to ensure everything is going well, we would highly recommend you conduct a health check on your finances at least once every 6-months.
This can help you remain confident that your credit stays in good standing, and can be useful if you are thinking about making an important purchase or perhaps applying for finance.
At present, most credit applications are first reviewed by a system before being considered by an actual person, which makes your credit score vital to ensure your application can reach the right hands. It makes it increasingly important to keep an eye out and optimize the score on your report! So, how can you achieve this?
5 Tips to improve your credit score
Now that you understand what a great credit score is and why it matters, let’s talk about some things you can do to ensure it remains healthy and in optimal condition!
1. Minimise your inquiries
If looking at your credit report and credit score did not provide the outcomes you expected, or if your score is healthy but still has room for improvement, this is the perfect time to set up a strategy!
Engaging a qualified professional to guide you through this process can be helpful, but as a first step, you will most definitely want to stay away from online credit inquiries as much as possible, as these can affect your credit score.
Online inquiries can be finance-related transactions such as using the services of a payday lender, opting into rent-to-buy schemes or even purchasing items that will be paid off in instalments.
Signing up for these often creates inquiries on your credit report, and if lodged within short periods of time can significantly affect the health of your credit score!
2. Be careful with those pre-approvals
Are you thinking about lodging in multiple loan pre-approvals? As smart as this might sound initially, it is a strategy that can actually work against you.
In a similar fashion to online inquiries, applying for multiple pre-approvals will affect your creditworthiness by lowering your score. In the long run, this will affect how much you can borrow unnecessarily.
Should you then abstain from obtaining pre-approvals at all? Not quite! Our team at Rise High are always happy to assist you in assessing whether getting a pre-approval in place is your best option, but in the meantime, you can learn more about pre-approvals in here.
3. Use your existing credit to your advantage!
Did you know keeping the use of your credit card below 70% of its capacity can actually help you build good credit over time? This percentage is referred to as a credit utilization ratio and is one of the factors that will influence your overall credit score.
Financial products like credit cards and home loans can help good credit to be built over time when used properly. Things like meeting your repayments on time every time, and ensuring you only ever use up to 70% of the total credit available to you on your credit card can help lenders perceive you as a safer borrower.
Would it then be advisable for you to get a credit card in order to increase your credit score?
At Rise High, we tend not to promote credit cards, and would certainly not advise getting a credit card for the sake of increasing your credit score. However, if you are confident about your ability to meet your repayments on time every time and are disciplined with your finances, having one can be okay.
4. Avoid defaulting
This tip takes into consideration the wider picture and is basically about building and keeping up healthy financial habits.
Ensuring you pay your bills on time to avoid being defaulted by your telecommunications provider, meeting your existing loan’s repayments, and just ensuring your financial responsibilities are being met, are all extremely important to protect your score’s well-being.
Every time you default or miss a payment, a negative score between 1 and 6 will be displayed in your credit report. The number will vary depending on how late you are to meet your payment from the time it was due and will dramatically lower your credit score and decrease your creditworthiness.
Having your finances in order before you go for a new purchase and looking for help in advance if you are foreseeing potential issues to meet your repayments is always the best approach!
5. Look at ALL your credit reports
These three have different ways to score your credit and as a result, might show a similar but slightly different picture when it comes to your credit report.
Having a look at the three reports can help you gather a well-rounded picture if you are not yet ready to obtain a proper comprehensive credit report. Often, surprise items you may have forgotten about or may not have considered could be dampening your credit score and can easily be removed from your daily expenses and lifestyle moving forward.
An additional benefit that comes with keeping an eye on these is being able to identify transactions that may have been lodged on your credit report mistakenly as a result of human error or even identity theft. If you have been moving houses you may also discover defaults coming from bills that might have been sent to your old address.
Obtaining these three reports or reaching out to a qualified professional who can help you with an initial assessment, is a great starting point. Alternatively, if you would like to have a look at the whole picture and access your comprehensive credit report, our team at Rise High can assist with this free of charge.
6. Bonus tip!
If you are an existing borrower and you do happen to be late on your repayments for any reason, aiming to cover your repayment within 14 days after the due date can help keep you safe from negatively impacting your credit report.
Furthermore, aiming to cover your repayments the day before they are actually due can help you build good credit over time!
We believe these can help guide you in the right direction, but if you are interested in learning more, here are a few more pointers to consider:
Remove negative items from your credit report
According to Pasha Mehr, Director at Credit Repair Solicitors, roughly 65% of adverse entries on credit reports could be the result of human error.
Whether that be incorrect use of names or debt collectors not following the right endeavours to contact you about outstanding payments, there is a possibility that some of the adverse entries on your report could simply be illegitimate.
In the case of accurate entries, it is important for you to be aware that these cannot be removed and will be a part of your credit report for a few years. Usually, negative items should fall off your credit report 7 years after they were initially lodged.
Open banking and the future of credit scoring
As open banking becomes more and more common, lenders have greater access to information. Whereas in the past they were only able to see very serious defaults on your account, they can now gain greater insight into late repayments and other transactions.
Before 2018, banks would really only have access to information about your transactions with them. As a result, if you had an issue with one of the Big 4 banks to set an example, and moved to a different bank, your new bank would be unable to know about your past history with another bank (whether that served you well in the case of missed repayments, or didn’t do you any favours in sharing your fantastic trustworthiness as a borrower).
Today banks can access this information and can furthermore gain insight into things like financial hardship, which can affect your credit score, credit report and ultimately, ability to get the finance you are after.
Pausing your credit report and your safety
Keeping your safety and financial integrity in mind, we also thought we would share with you two great options you have to protect your credit report. With cybercrime rapidly increasing and cybersecurity representing such a huge part of our lives, options do exist for your to pause and protect your credit report.
Choosing to put a hold on your credit file or “freeze” your credit file can help you stay safe if you have been informed of any potential data breaches that could compromise the integrity of your financial health.
Alternatively, credit reporting bureaus like Equifax often offer options to subscribe and receive alerts whenever new inquiries are lodged on your report, so you can keep an eye on suspicious activity.
At Rise High, it is our greatest pleasure to help and support you, providing you access to the right tools and expert advice to make the right decisions. Whether that be assisting you in finding the right loan or refinancing your existing one.
As your brokers, we will always make sure to provide the right advice and ensure to equip you with the knowledge you need to make an informed choice. Since we work for you (not the banks), it is our greatest pride to always put your best interests first!
Are looking for specific advice based on your current circumstances and the state of the lending market? Our award-winning brokers are always happy to help! Get in touch with our lovely team today!