Why you can't afford to ignore your credit score

Why you can't afford to ignore your credit score

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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Learn more about bank accounts

Can Centrelink access your bank account?

Yes, Centrelink can access your bank account, but only if you give them a reason to. Centrelink uses data-matching software with other federal government agencies to help it crack down on welfare cheats.

This is why it’s important to give true and matching information to all government agencies.

For example, if you report to Centrelink your annual income is $25,000, but at tax time you report your income as $50,000 with the ATO, it’s likely you’ll be ‘red flagged’.

At this point, Centrelink can legally request that your bank hand over your personal bank account details, to review your finances.

In most cases, Centrelink does not have the authority to take money out of your account. You will usually be given written notice to repay the debt.

However, Centrelink can also reduce your benefits until you’ve paid back what you owe. In extreme cases, Centrelink can garnish your wages and assets (including money in your bank account) until your debt is repaid.

How do I close a bank account?

Closing a bank account is one of those tasks that’s easy to put in the too-hard basket. There are quite a few steps involved, some which may require you to hang on the phone for a while.  

Here’s a handy checklist of items to tick off, so the job gets done quicker. If you don’t do your banking online, the following steps can also be done at a branch.   

  • Cancel any scheduled or recurring payments
  • Update your direct debit details (such as loan repayments) with creditors
  • Export your payee address book (to keep a record of saved third-party bank account details)
  • Transfer the balance of your account (to the new bank account)
  • Close your account online, or by calling the bank or visiting a branch

How do I open a bank account for a baby?

If you’ve just welcome a new baby into the world, congratulations. Opening a bank account for your child can be a wonderful first gift.

Before you can open your child an account, you’ll need to have a birth certificate or passport for your baby.

As the parent or guardian, you’ll also be listed as a joint holder on the account. This means you’ll need to have proof of your identification and address (a driver’s licence, passport, birth certificate or Medicare Card).

Many banks and credit unions offer baby banks accounts. Usually, you can apply online; otherwise you can head into a local branch or office with your documents.

How do I open a new bank account?

There are a number of ways to open a new bank account – online, over the phone or in the branch. The trick is to decide what type of bank account you want beforehand.

It might sound like a simple enough task, but there are literally hundreds of bank accounts to choose from. And each offer their own banking features and benefits.

A comparison site like RateCity can help you work out what bank account product matches your needs.

Once you’ve made up your mind what you want, it’s advisable to have the following information ready for the application process.

  • A couple of forms of identification (such as driver’s licence, Medicare card, passport)
  • Tax file number
  • Residential address, contact phone number and email (though email is not essential)

How do I open a bank account if I'm under 18?

The good news for savvy young folks like you wanting to take charge of your finances is that there are many bank accounts available for under-18s.

For bank accounts that require you to be 18 or older, you’ll have to rope in a parent or guardian to open the account for you.

Otherwise, you can apply by yourself online or at the branch of the bank, credit union or building society that has the account you would like to open. 

If applying online, you might be asked for a form of identification. For under-18s, this could be a Medicare card you’re listed on, your birth certificate and/or your current home address.

In most cases, you can verify your identity online (at the time of applying) or at the branch afterwards.

Do I need to open a business bank account?

Just because you’re in business doesn’t necessarily mean you need a business bank account. You could be a sole trader not registered for GST, and use your personal bank account for business.

If you do want a business account, there are plenty of benefits attached to business transaction and savings accounts, as well as business term deposits.

There are business bank accounts designed for businesses with a high volume of transactions, and those for start-ups with a small amount of trade. You could also include an EFTPOS service with your account.

Some business bank accounts charge for the number of transactions per month, while others offer a pay-as-you-go fee structure, where you only pay fees for transactions you make.

It’s up to you whether your priority is mainly transactions, or earning the maximum amount of interest on your principal. There’s a business banking solution for you if you need one.

Can you deposit money into somebody else's bank account?

One of the easiest banking tasks in the world is depositing money. You can even deposit money into someone else’s bank account if you wish.

The basic information you need to deposit money into a third-party bank account is:

  • Payee’s name
  • Bank, building society or credit union (though this isn’t necessary)
  • BSB (or bank code, which is the branch identifier)
  • Account number

Including the name of the financial institution isn’t necessary – particularly with online banking – because the BSB will identify this for you.

A handy tip is to record yourself (or add a personal message) in the transaction description or reference. This will show up on the recipients account, letting them know who’s paid them the money.

How can I find bank accounts in my name?

To find ‘live’ bank accounts in your name, you’ll have to ask individual lenders, which involves contacting them one by one and proving your identity each time. To find ‘unclaimed’ bank accounts (those that have been inactive for at least seven years), you can use this website.

How do I open a bank account for a child?

There are few better ways for a child to learn about money management than through savings. And there’s a plethora of bank accounts designed specifically for young people and children.

A bank account for a child can be opened online, over the phone or in a branch in a few easy steps. The minimum age a child can open a bank account for themselves usually ranges between 12 and 14.

If the child is too young to open the account, you can do it for them as their legal parent or guardian. 

To do this, you would need to be over 18, have an Australian residential address and currently reside in Australia (or have proof of residency).

You would also need to provide:

  • Identification for yourself and the child
  • Your tax file number (TFN) or TFN exemption

Depending on the bank account, you might be able to choose what level of access the child has to their bank account (online and via the phone).

Do you need a bank account to get a credit card?

To get a credit card, you need to show proof of income, which will almost certainly require you to have a bank account.

Can I find my bank account number online?

Yes, you can find your bank account number by logging into your online banking and clicking on the relevant account.

Can I open a bank account in another country?

Despite having a bad rap for facilitating tax evasion, it is possible and legal to open a bank account in another country, also known as an ‘offshore account’.

Some people choose to open a bank account in another country to invest overseas, for higher interest-earning potential or to access foreign banking services.

The process for opening an offshore bank account differs depending on the financial institution and country in which you’re opening the account.

Typically, you will need to provide identification such as a passport, a local bank statement and a signed declaration proving the source of the money being used to open your account. Usually, deposits into offshore accounts can be made by international money transfer.

Do you need a bank account to sell on eBay?

You don’t need a bank account to sell on eBay. But if you don’t have a bank account, you must provide either a credit card or debit card.

How can I deposit cash into my bank account?

The traditional way to deposit cash into your bank account is to go to a branch and give it to a teller. These days, many banks will allow you to make deposits through an ATM as well.