9 ways to improve your credit score

9 ways to improve your credit score

If you want to learn how to improve your credit score, you’ve come to the right place.

We’ve got nine great tips that can help you boost your standing in the eyes of banks and other credit providers.

Some of these tips will be quick wins; others will take longer to implement. What they have in common is that they’ll turn you into a more credit-worthy consumer.

Why are credit scores important?

There are four main benefits that come from having a good credit score:

  1. More companies want to do business with you, so you have more choice
  2. Your credit applications are more likely to be approved
  3. You can borrow more money
  4. You may be offered lower interest rates or fees

Close extra credit cards

Unless you have a very good reason for needing multiple credit cards, it’s often a good idea to have just one – or even none if you can get by on cash and debit card alone.

Closing those extra card card accounts will reduce the amount of money you can borrow, which in turn will have two benefits.

First, it will reduce your temptation to accumulate more debt. Second, it will improve your credit profile, because when banks assess a loan application, they often work on the assumption that the borrower’s credit cards are permanently maxed out.

Equifax credit scores explained…

  • 833 to 1,200 = Excellent
  • 726 to 832 = Very good
  • 622 to 725 = Good
  • 510 to 621 = Average
  • 509 or less = Below average

Reduce your credit card limit

Assuming you have just one credit card, the next step is to assess the credit limit on that card.

What’s the maximum amount of money you to need to have on call? If you think you can get by with less, you might want to ask your credit card provider to reduce your limit.

Now, when you apply for a loan and a lender assumes your credit card is permanently maxed out, less debt will be tied to your name.

Pay off your entire credit card debt each month

It might be tempting to make just the minimum monthly repayment, which is often between 2 and 3 per cent of your credit card debt.

However, if you pay 100 per cent of the debt each month, you’ll not only reduce the amount of interest you have to pay, you’ll also boost your credit score.

That’s because banks and other credit providers look positively on Australians who eliminate debt at the first available opportunity.

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Make loan repayments on time

Whatever your debt – home loan, car loan, personal loan, credit card – it’s important you stick to the repayment schedule.

Making each and every repayment on time is good for your credit score, because it sends a message to lenders that you’re a responsible borrower. Falling behind on your repayments, though, sends the opposite message.

Pay off loans

At the risk of stating the obvious, lenders like it when people repay loans! So if you want to boost your credit score, make sure you repay any loan you take out. Defaulting on loans, by contrast, will damage your credit score.

Experian credit scores explained…

  • 961 to 999 = Excellent
  • 881 to 960 = Good
  • 721 to 880 = Fair
  • 561 to 720 = Poor
  • 560 or less = Very poor

Consolidate multiple debts

Another way to improve your credit score is to convert multiple debts with higher interest rates into one debt with a lower interest rate.

For example, imagine you had these three debts:

  • Credit card #1 – $6,000 debt at 17.99 per cent interest
  • Credit card #2 – $4,000 debt at 19.99 per cent interest
  • Personal loan – $8,000 debt at 12.50 per cent interest

In that case, you’d be able to improve your financial position by doing the following:

  • Taking out a new personal loan, for $18,000, at 12.50 per cent interest
  • Using the new personal loan to pay off your old personal loan and your two credit cards

There are three reasons why lenders and other credit providers would regard this as an improvement:

  1. You would have one loan to manage, instead of three
  2. Your overall interest bill would be lower
  3. You would have a repayment plan to follow (personal loans come with repayment plans – credit cards don’t)

How to improve your credit score

  1. Close extra credit cards
  2. Reduce your credit card limit
  3. Pay off your entire credit card debt each month
  4. Make loan repayments on time
  5. Pay off loans
  6. Consolidate multiple debts
  7. Set up direct debits to pay bills on time
  8. Fix errors on your credit file
  9. Minimise credit applications

Set up direct debits to pay bills on time

It’s good for your credit score when you pay your rent, phone bill, internet bill, water bill, electricity bill and other bills on time – and bad when you don’t.

Direct debits can make the process easier. By setting up an automated payment system, you no longer have to remember to pay bills, and no longer have to find the time.

A word of warning: make sure there’s always enough money in your account to cover the direct debits, because a missed payment will damage your credit score.

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Fix errors on your credit file

Sometimes, a person’s credit score might be lower than it should be because their credit file contains false entries or important omissions.

For example, a simple typo could misrepresent how much debt you’re carrying, if a lender says you took out a personal loan for $27,000 instead of $2,700.

Alternatively, the lender’s computer system might play up and forget to record that you’ve been making the repayments on your personal loan.

It’s also possible that your credit file might contain a loan you never even took out – because it was actually taken out by someone with an identical name and mistakenly attributed to you.

Before you can fix errors, you first need to find out if any exist. To do that, you’ll need to contact one of Australia’s credit reporting bodies – Equifax, Experian and Illion – and request a credit report. You’re entitled to one free credit report per year.

If you spot any mistakes, you should contact the credit provider and/or the credit reporting body and ask to have them removed. If that doesn’t work, you should contact the relevant ombudsman.

One final point: only mistakes can be removed. Credit providers and credit reporting bodies won’t remove accurate information from your credit file.

Illion credit scores explained…

  • 800 to 1,000 = High end
  • 700 to 799 = Great
  • 500 to 699 = Average
  • 300 to 499 = Room to improve
  • 299 or less = Low

Minimise credit applications

As a general rule, your credit score benefits when you’re seen to be a responsible user of loans and credit cards – and suffers when you’re not.

With that in mind, it’s good for your credit score when you make a limited number of credit applications – but bad when you make a lot.

Why? The reason is that someone who makes a limited number of applications is generally regarded as more responsible than someone who makes a lot.

The moral to the story is to be very selective in your credit applications. Here are three tips you might want to consider:

  1. Don’t apply for credit cards or loans unless you definitely need them
  2. Don’t apply for any credit product without first asking the provider to estimate your chance of approval – because if your odds are remote, it might be better not to apply at all
  3. Don’t rush the process by applying for, say, three credit cards or three personal loans at once – make just the one application, even if it forces you to wait longer

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What causes bad credit ratings/scores?

Failing to repay loans and bills will damage your credit score. So will falling behind on your repayments. Your credit score will also suffer if you apply for credit too often or have credit applications rejected.

What is a credit rating/score?

Your credit rating or credit score is a number that summarises how credit-worthy you are based on your credit history.

The lower your score, the more likely you are to be denied a loan or forced to pay a higher interest rate.

How can I improve my credit rating/score?

Your credit score will improve if you demonstrate that you’ve become more credit-worthy. You can do that by minimising loan applications, clearing up defaults and paying bills on time.

Another tip is to get the one free credit report you’re entitled to each year – that way, you’ll be able to identify and fix any errors.

If you want to fix an error, the first thing you should do is speak with the credit reporting body, which may take care of the problem or contact credit providers on your behalf.

The next step would be to contact your credit provider. If that doesn’t work, you can refer the matter to the credit provider’s independent dispute resolution scheme, which would be the Australian Financial Complaints Authority (AFCA).

AFCA provides consumers and small businesses with fair, free and independent dispute resolution for financial complaints.

If that doesn’t work, your final options are to contact the Privacy Commissioner and then the Office of the Information Commissioner.

Will comprehensive credit reporting change my credit score?

Comprehensive credit reporting may change your credit score, either positively or negatively, depending on an individual's situation.

Under comprehensive credit reporting, credit providers will share more information, both positive and negative, about how you and other Australians manage credit products. That means credit reporting bureaus will be able to make a more thorough assessment of everyone’s credit behaviour. That will lead to higher scores for some consumers and lower scores for others.

How do I know if I've got a bad credit history?

You can find out what your credit history looks like by accessing what's known as your credit rating or credit score. You're also able to check your credit report for free once per year.

Is it hard to improve your credit score?

It can be hard to improve your credit score, as it usually requires sacrifice and discipline, but hard doesn’t necessarily mean complicated. Some simple ways you can give your credit score a boost include closing extra credit cards, reducing your credit card limit, pay off any loans and make loan repayments on time.

As a general rule, the lower your credit score, the more remedies you can apply and the greater the scope for improvement.

How long will I have bad credit?

Most negative events that appear on a person’s credit file will stay in their credit history for up to seven years.

You may be able to improve your credit score by correcting errors in your credit report, clearing outstanding debts, and maintaining good financial habits over time.

Can students with no credit history get loans?

It is possible for students with no available history of borrowing or managing money to get a personal loan, though it may be more difficult as well as expensive than for borrowers with a good credit history.

Having no credit history means having no credit score. While many lenders may consider having no credit score to be better than having a bad credit score, they may still consider it riskier to lend to an unknown borrower and may charge higher interest rates or fees than to borrowers with good credit scores.

Are there emergency loans with no credit checks?

While many personal loans require a credit check as part of the application process, some personal loans and payday loans have no credit checks, which may appeal to some borrowers with a bad credit score.

Keep in mind that even if a loan is available with no credit check, the lender will likely want to confirm that you can afford the repayments on your current income.

Does refinancing a personal loan hurt your credit score?

Personal loan refinancing means taking out a new loan with more desirable terms in order to access a more competitive interest rate, longer loan term, better features, or even to consolidate debts.

In some situations, refinancing a personal loan can improve your credit score, while in others, it may have a negative impact. If you refinance multiple loans by consolidating these into one loan, it could improve your credit score as you’ll have only one outstanding debt liability. Your credit may also improve if you consistently pay the instalments on time.

However, applying to refinance with multiple lenders could negatively affect your credit if your applications are rejected. Also, if you delay or default the repayment, your credit score reduces.

Do $4000 loans have no credit checks?

Many medium amount loans for $4000 have no credit checks and are instead assessed based on your current ability to repay the loan, rather than by looking at your credit history. While these loans can appear attractive to bad credit borrowers, it’s important to remember that they often have high fees and can be costlier than other options.

Personal loans for $4000 are more likely to have longer loan terms and will require a credit check as part of the application process. Bad credit borrowers may see their $4000 loan applications declined or have to pay higher interest rates than good credit borrowers.

Who calculates your credit rating/score?

Credit ratings or credit scores are calculated by credit reporting bodies. The main bodies are Equifax, Dun & Bradstreet, Experian and the Tasmanian Collection Service.

When was comprehensive credit reporting introduced?

Comprehensive credit reporting was introduced to make credit reports fairer and more accurate. Under the previous system, credit providers only saw negative information about potential borrowers. Now, they're able to see both positive and negative information, which means that credit providers can see if a borrower’s negative credit behaviour is consistent or a mere one-off.

How do I consolidate my debt if I have bad credit?

The worse your credit history, the harder you will find it to consolidate your debts, because lenders will be less willing to lend you money and will charge you higher interest rates.

However, people with bad credit histories can make debt consolidation work by following this three-step process:

  1. First, find a lender willing to give you a bad credit personal loan. This process will be simplified if you go through a finance broker or use a comparison website like RateCity.
  2. Second, make sure the interest repayments on your new loan are less than the repayments on the loans being replaced.
  3. Third, instead of spending those savings, use them to pay off the new loan.