Understanding your credit rating is essential to managing your finances and accessing loans and credit.
Your credit rating is a measure of your creditworthiness and financial responsibility, and can significantly impact the terms and conditions of your loan. A good credit rating means that you are considered a low-risk borrower, while a poor credit rating means that you are considered a high-risk borrower.
Lenders use your credit rating to determine whether to approve your loan application, how much they should lend you, and at what interest rate. If your credit rating is high, you are more likely to be approved for a loan and you may be able to secure a lower interest rate. On the other hand, if your credit rating score is low, you may be denied a car loan, or you may be approved at a higher interest rate. It’s important to note that it is not just lenders who utilise credit ratings. Many other companies such as electricity or telephone providers also make use of this information when making decisions about their customers.
By understanding your credit rating and taking steps to maintain or improve it, you will be set up to access better rates on loans and other products, increase your chance of approval, and, ultimately save money over time.
What are some tips for understanding my credit rating?
Access your credit report
In Australia the two major credit reporting agencies are Equifax and Experian. Both companies provide credit reports that list your credit history and other information that is used to determine your credit score. Many banks and other financial institutions also provide free credit rating information to their customers.
To obtain a credit report you will typically need to provide some personal information such as your name, address, and date of birth. You may also be asked to verify your identity using a government-issued ID such as a driver’s license or passport.
In Australia your credit rating will be a score ranging from 0 to 1,200. A score of over 1,000 is considered excellent, and 700 to 1,000 is considered very good. Scores 700 and under suggest that you may have had some issues with managing your finances in the past.
Understand the factors that can impact your credit rating
There are several factors you need to consider when understanding your credit rating. These include:
- Payment history: Lenders want to know about your previous financial behaviour and if you have a history of making payments on time. Late or missed payments will have a negative impact on your rating.
- Credit history length: a long credit history generally suggests that you are a reliable borrower. A borrower with a shorter credit history, or no credit history at all, may be considered a higher risk.
- Amount of credit: lenders want to know how much credit you have access too currently and what your utilisation is. If you are using a lot of credit, it may suggest you are overextending yourself financially and negatively impact your rating.
- Types of credit: Having a good mixture of credit types such as instalment loans, credit cards, or a mortgage, may have a positive impact on your credit rating as it supports your reliability.
- Credit enquiries: each time you apply for credit, an inquiry is made on your credit report. If you have a lot of these in a short period of time it may cause concern from lenders.
- Legal records: bankruptcy, debt agreements or legal judgements may affect a credit score.
Some simple ways to improve, or maintain your credit rating, is to keep your credit card balances low, avoid applying for too much credit at once and pay your bills on time. If you think you may miss a payment date contact the company beforehand to discuss your options.
Conduct regular checks of your credit report
Regularly checking your credit score is recommended, to assist in understanding your credit rating generally and to ensure there is no fraudulent activity or errors. If you suspect that you have been a victim of identify theft or fraud, you should check your credit report for unauthorised accounts and charges, and dispute them with the credit bureau as soon as possible. Regularly checking your credit report can also help you to identify any negative trends in your credit score e.g. how did reducing your loan repayments impact your score.
It’s important to keep in mind that credit scoring models can vary, and lenders might use their own systems or models that weight different factors differently. If you’re still thinking “I need help understanding my credit score” get in touch with the qualified and reliable car finance brokers at Fido Finance by visiting us online or calling the team at 13 34 36.