If you don’t know your credit score, you’re not alone. Many of us are clueless about our credit score let alone how a credit score works. YBI reports.
No doubt you’ve heard of credit reporting and credit scores, but chances are you are at a loss as to how they work, let alone whether you have a good credit score, a bad credit score or come in at the average.
What is a credit score?
Credit scores reflect your credit history to date. The higher your score, the more trustworthy and likely you are to meet your credit obligations. Credit scores can provide a lender with a quick snapshot of your ability to meet payments. Your credit score is based on information that is reported to credit bureaus such as Equifax or Experian. These bureaus don’t lend money but rather they keep a report on your credit payments. A day late with a payment – there it goes, on your report – defaulted on a loan – on your report – been declared bankrupt – it’s all on your report.
Understand your credit score
Until recently credit reports only maintained information about missed payments and defaults. However, nowadays your credit score and report will also reflect your good credit history too. You also don’t have just one credit score – different financial institutions use different models: there’s the FiCO score, which ranges from 300-850, Equifax (280-850) and Experian (360-840). There’s also a score the three credit bureaus created together called the VantageScore which ranges from 500-990. No matter which model is used, as your credit information is updated, your score will change for the better or worse. More and more agencies are adding their information each month, while some information (such as civil orders) have been removed, so fluctuations in your credit score are to be expected.
Why your credit score is important
If you plan on applying for credit, whether that is a home loan or a credit card, your lender will review your credit score and credit report to get an understanding of your ability to meet your financial obligations. The better your credit score the less risky you appear to a financer. If you have a high credit score and a good credit report a lender may reward you by offering you a better rate than someone with a lower credit score.
How can I fix my credit score?
If your credit score is not looking as great as it could, you have few options to get it back on track. Let’s start with your payments. Your payment history reflects around 3-40 per cent of your credit score. It’s essential you make payments on time. Late payments imply you are a credit risk. Always pay your bills by the due date. If you have credit card, start paying it down. While your credit score will reflect whether you have been paying your cards off on time it also analyses your debt balances. If you have a $10,000 credit card limit and you have $5000 racked up on your card – your credit utilisation ratio is 50 per cent. Credit providers like to see a ratio of 20-30 per cent. If you can get your card utilisation ratio down to this level your credit score will also improve. Your credit history also makes up around 15 per cent of your score. If you have credit card you aren’t using and it attracts no fees to maintain, it is worth keeping the account active (open) simply for the fact that it adds to your credit score. Having a long history of using credit responsibly shows lenders that they can count on you to make payments on time in the future.
How to check your credit score
Checking your credit score is easy to do and it’s free. There are a number of sites that offer this service such as creditsimple.com.au. You can also request a free copy of your credit report (each year) from the main credit reporting agencies Equifax, Experian and Dun&Bradstreet.