Credit score: Why is it important?
Your credit score is very important when you apply to borrow money – whether that’s from a bank, for a credit card, or even a phone payment plan. The lender will look at your credit score to help them decide whether you are likely to repay the money you have applied to borrow. Watch this jargon buster video to learn more about how your credit score is calculated and the actions you can take to ensure you maintain a healthy credit score for the next time you want to borrow.
I’m sure you’ve heard the term ‘Credit score’ going around but what is it, and why is it important? Your credit score is very important when you apply to borrow money – whether that’s from a bank, for a credit card, or even a phone payment plan.
The lender will look at your credit score to help them decide whether you are likely to repay the money you have applied to borrow.
Your credit score is a summary of your credit report. Your credit report is compiled from – All your past and present borrowing activities. Think things like what loans you have applied for, what money you have borrowed, and whether you’ve repaid it on time. – Telecommunication and utility providers who report on unpaid or late payments of their bills. – ASIC and the court system also provide information on any outstanding judgements or bankruptcies.
All of this information is then distilled down into a Credit score. Depending on which agency you obtain your score from this could be a number between 0 and 1000 or 1200. The higher your score the better. Your credit report and score will only include enough personal information to identify you. It doesn’t include information on your income, savings, or the assets you own.
It’s a good idea to check your credit score and report regularly. You are entitled to one free report each year, and it’s important to ensure it remains accurate and that it hasn’t been impacted by fraudulent activity such as someone applying for finance in your name. If your credit score is not looking as healthy as you would like, or if perhaps you’ve had a loan application declined, check all the information in the report to confirm that it is accurate.
Look for the negative listings; things like multiple credit enquiries in a short space of time, multiple credit cards with high limits, late payments or unmade payments. If there are any inaccuracies, approach the credit provider to get your report corrected. A credit repair agency can help you with this, but they will charge you a fee for their service.
There may be listings that you can improve. Look for high credit card limits that you don’t use and get them reduced; if you have multiple personal loans or credit cards look to consolidate them, especially if you can do so on a 0% transfer offer and repay as much as you can while you’re not paying interest; pay any overdue accounts as soon as possible because if they’re there for more than 60 days the default will remain on your report for 5 years.
The keys to keeping a healthy credit score to enable you to access loans when you need them are: – ensure you pay your bills on time, – make your repayments on time, – don’t have unused credit limits, and – don’t make multiple unnecessary credit applications. These simple actions will help ensure your credit score remains healthy for when you need it.
Curious to know more about finances? Have a look at the range of other Davidson Institute financial education resources on their website.