What is a Credit Score and Why Does it Matter?
Have you ever checked to see what is your credit rating or credit score? Were you even aware that you have a credit file? And most importantly, do you know how this information is used by financial institutions and service providers? Read on for the important basics you should know.
So, what is a credit score?
Like most Australians, if you’ve ever applied for a credit card, insurance policy, car or home loan or even a mobile phone service, lenders/providers have to decide if they should lend you the money or service. They will check the credit history on your credit file, which sums up all the information into one computer-generated number – your credit score.
Your credit score, also known as a credit rating, acts as an indicator of how likely you are to repay your debts and make payments on time:
- A higher score means you have a good credit rating and supports your ability to meet financial obligations and pay your debts when due. You would be more likely to get a better deal.
- A low credit score means you have a bad credit rating and suggests that you’re probably at a higher risk of defaulting on your payments. That could impact your borrowing power.
Your credit file is the key
Your credit file, held by the Credit Bureau records all your financial movements over time. It has information like how long you’ve had your accounts, outstanding debt and collection actions, missed loan repayments, any declared bankruptcies, the number of credit cards, store cards and loans you’ve applied for. A scoring system determines your credit score — this number helps predict your creditworthiness.
FACT: A higher credit score gives you access to better deals.
That’s why your credit score is important. Also, understanding what factors can improve or hurt your credit score can help you maintain a healthy financial outlook. Your credit score directly influences the amount of loan or credit that a lender or credit provider will be prepared to offer you and the interest rate and other payment terms they may offer.
What can you do to improve my credit score?
Here are FOUR tips to help improve your credit score:
- focus on paying your bills on time and in full
- settle all outstanding balances quickly
- prevent overdrawing on your credit cards
- stop applying for new credit cards or loans too often.
It is important to bear in mind that all companies have different scoring systems, and the scores may be based on more than the information in your credit file. When you apply for a mortgage, for example, the lender may consider other factors like their internal records, all the information on your application, amount of your deposit, your total debt, and proof of stable employment and income to generate their own credit score.
An important part of getting your personal finances in order is to know your credit score. If you’ve made multiple loan inquiries and been declined, even once, that gets recorded on your credit file, potentially lowering your credit score and hurting your future chances of getting a loan till your credit score improves. By understanding how your credit file affects your credit score and impacts your ability to borrow money, you can make better financial decisions and aim to improve your credit score.
At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.
But don’t worry, we can help with that.
If you’re thinking of buying a home, you can contact us for advice about the best options for you when it comes to your mortgage. The cost of your mortgage can drastically affect your financial planning, so it pays to speak to the experts about it.