Why you can't afford to ignore your credit score



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It’s been said that having a bad credit score is more detrimental than having a bad reputation, and when it comes to taking out a personal loan, or something as simple as going on a new mobile plan, it’s clear this is true.

A credit score is a tool that banks, credit card providers and other institutions (such as mobile companies), use to help determine your reliability as a borrower and customer. This score is based on your credit history and debt, and is determined using details from your personal finances.

If you’ve been putting off checking your credit score in fear of an average rating, you could be making common mistakes that are detrimental to your credit history. Worse, you are missing a valuable opportunity to improve your score.

How is my credit score calculated?

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According to Equifax Credit Score System, your credit score can be between 0 and 1200 depending on multiple factors, outlined in the following credit score bands and ranges:

833 – 1200: Excellent
You are a reliable borrower and among the top 20 percent of the credit-active population of Australia. Your odds of keeping a clean file are five times better than the average Equifax credit-active population.

726 – 832: Very good
Although you had your share of financial misses, you still have a decent score. Your chances of keeping a clean credit report are two times better than the average Equifax credit-active population.

622 – 725: Good
Your odds of keeping a clean credit report are better than the average Equifax credit-active population. It’s less likely you will face an adverse event in the next 12 months.

510 – 621: Average
It’s likely that you might experience an unfavourable event such as a default, bankruptcy or court judgment in the next 12 months.

Why you shouldn’t turn a blind eye to your credit score

  1. Looking for a home loan?

If you’re ignoring your credit score and are in the process of searching and applying for a home loan, you could be hit with a higher interest rate. If you have a lower than average score a home loan provider may feel they need to charge you a higher interest rate than someone with an ‘excellent’ rating may be offered.

This is because your credit score helps home loan lenders to determine your reliability as a borrower, and the higher your score the higher the indication that you are a lower risk than others on defaulting on the loan.

  1. Looking for a personal loan?

Whether you need a little extra help planning your wedding, want to consolidate debt or purchase a car, your credit score will be a key factor in this process. As with a home loan, your credit score helps to determine your ability to pay back a personal loan. If your score is out of the desired range you may need to offer up security to take out a loan – if you’re not outright rejected altogether.

While a secured personal loan is not an uncommon type of loan, you may have initially been on the hunt for an unsecured loan. Secured loans require you of offer up security against the loan, such as cars, jewellery, term deposits and other assets.

The downside of this is that if you default, the lender will claim the security. This is particularly important to consider for car loans, as some lenders only accept new vehicles (less than two years old) as a guarantee. Further, if your car devalues and you default on the loan, the lender can still take you to court to pay the difference.

  1. Looking for a credit card?

It’s a little known fact that if you have a lower than average credit score, or no credit history altogether, applying for a credit card and being rejected can adversely affect your credit score. If you’ve never looked at what your credit score is and have applied for a credit card, you could be setting yourself up to fail without even realising.

  1. You may be a victim of fraud

Another key reason you shouldn’t ignore your credit score is because your credit history could include mistakes. This is not an uncommon thing to happen, and one of the most frequently occurring errors could be a family member, or stranger with a similar name to yourself, having their credit history mistaken for yours. Worse, someone could have committed identity fraud using your personal details and caused damage to your credit history.

The Australian Securities & Investments Commission (ASIC) provides a detailed explanation on how to fix incorrect information on your credit report, and how to contact an Ombudsman if you need help.

How can I improve my credit score?

Whether you’ve never checked your credit score, or you know it’s fallen and you’re too nervous to look, it’s crucial that you shake off these fears and bite the bullet.

There are a range of ways to try and improve your credit score, and it starts with ripping the band-aid and going through your credit history with a fine-tooth comb.

  1. Check for mistakes – as we’ve already mentioned, it’s not uncommon for mistakes to appear in your credit history.
  2. Pay off your existing debts – if you’re drowning in debt you’ll struggle to improve your credit score. Work on paying off your debt ASAP.
  3. Cancel your credit card(s) – if you don’t trust yourself to stay out of debt, a little self-control (and a pair of scissors) may be required.
  4. Add positive information to your credit report – there are a few lifestyle and financial factors which, if they have not been included in your report, should be added by contacting a credit reporting agency.
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