A credit rating estimates a person or company’s credit worthiness and is an evaluation made about a borrower’s overall credit history. A credit rating is also used to determine a borrower’s ability to repay debt.
Your credit rating, or credit file, is updated by credit providers when you apply for a credit card or loan. It’s then accessed by potential lenders to help them determine whether or not to lend you money.
A credit file typically includes information about you such as your name, age, gender, driver’s licence details and residential and employment information. It may also contain consumer credit information from the past five years as well as commercial credit information and details from the public record such as bankruptcy information or court judgements, etcetera.
Credit-related information is held about you and primarily used by banks, building societies, finance companies, telecommunications and utility companies to assist them in assessing credit applications.
Viewing your credit rating
In Australia, the Office of the Australian Information Commissioner provides details about how to obtain a copy of your credit report or credit rating. There are two main reporting agencies – Veda Advantage and Dun & Bradstreet.
It may be a good idea to view your credit rating before applying for a new loan or credit card in case you wish to dispute any information that tarnishes your credit rating.
That’s because a poor credit rating indicates a higher risk of defaulting on a loan and can lead to your loan or credit card application being knocked back.
Some institutions will still lend to a person with a less than perfect credit history (in the case of some personal or car loans), but you’re likely to have to pay a higher rate of interest for the privilege.
Overcome a poor credit rating
If you’re in the market for a credit card and are concerned about your credit rating the best thing you can do is pay down any existing debts or outstanding bills and establish a savings pattern. This will show potential lenders that you’re able to service a loan or make regular repayments on a credit card.
The following tips may also help:
- Limit your applications – you might be tempted to put in several credit card applications thinking you’ll increase your chances of approval, but doing so can negatively impact your credit rating particularly if you’re knocked back
- Compare credit cards – shopping around for the best deal at comparison websites such as RateCity will save you time and potentially hundreds, if not thousands, of dollars. The trick is to find a product with the lowest rates and fees that will suit your circumstances.