A strong personal credit rating is very much an essential part of modern life. With a strong credit rating, people can enjoy access to financing for a number of purchases.
Understanding Credit in Practical Terms
The most expensive thing most people will ever buy is a house. Our credit rating informs our prospective mortgage lenders whether we’re likely to be a “good debtor” and make our repayments on time, while it can also strongly influence how much our monthly repayment is going to be as well as our monthly interest rate.
At the same time, if you want to take out a contract on the latest version of the iPhone with Telstra, your credit rating will determine whether you’re seen as suitable for this, too.
Your credit rating can be significant for these purchases and various others in between these two extremes of scale. It will also be taken into account if you apply for a personal loan. Some employers may even consider your credit rating as an alternative type of reference check, to help decide whether you’re likely to be reliable and trustworthy.
Improving Your Credit Rating
While improving and maintaining a credit rating isn’t an exact science, there are many things we do know that influence credit ratings, meaning we can therefore provide some practical tips on how to increase your own.
There is plenty you can do to put yourself in a strong position so that when you do apply for credit for whatever reason, you know your chances of success are likely to be good.
Here are some pointers that will help you increase your credit rating.
While improving and maintaining a credit rating isn’t an exact science, there are many things we do know that influence credit ratings, meaning we can therefore provide some practical Tips on how to increase your own.
Access Your Credit Report
Your credit report can tell you pretty much everything you need to know about your own financial status and history. If you don’t check your credit rating and report first, it is unlikely you’re going to be able to unlock much of the knowledge to improve it.
Access your credit report through Veda or one of the other credit reporting agencies that operate in Australia.
While simply accessing your credit report doesn’t instantly improve your credit rating, it can inform you of the next steps you might want to take.
You should look at:
- The records held highlighting your current financial reality, status, and previous financial activities.
- Checking that these are accurate and up to date.
- Checking the record of how many credit applications you have completed.
- Checking that your personal information including address history is correct.
Conducting these simple checks will enable you to make sure everything is as it should be, and that there is nothing holding back your credit score erroneously. Usually, everything will be correct, but you should take the time to check the account records held and the historic applications in particular, as these are more likely to help you identify if you have been a victim of fraud or attempted fraud.
Credit Report Queries
If you do need to query anything on your credit report, you should do so with the lender listed on the report in the first instance. If you believe you have been the victim of identity fraud or attempted identity fraud you may need to contact your local police department, SCAMwatch, or IDcare prior to notifying a lender.
In most cases, lenders will be sympathetic right away. Naturally they may also be wary of fraud by individuals looking to remove genuine debts from their own credit record. However you will be able to work with them to remove anything that shouldn’t be there.
If you still have trouble removing false information from your credit report, the credit reporting agency will be able to help. Once you have solved your current issues, it might be worth taking out ID protection with the agency, as this notifies you whenever a credit application is made in your name, allowing you to confirm if each one is legitimate.
With your credit report dealt with, we can now look at some of the factors that will help you to increase your credit rating.
Don’t Apply for Credit ‘in Bulk’
If you’re turned down for credit from one lender the natural instantaneous reaction might be to try somewhere else right away. However, this might be doing your chances of securing credit a great deal of harm.
Why? Regular applications for credit are perceived as betraying a lack of financial control on behalf of the applicant, as it makes it seem to credit agencies that there is an urgent need for finance rather than a genuine requirement to fund a purchase, for example.
Avoid Unused Credit
People sometimes fall into the vanity trap of having credit cards for the sake of it. They don’t use them and don’t really need them, but having $5,000 to hand if it’s needed is always a comforting factor.
Unfortunately, it can be detrimental to your credit rating, as you’re not building up any history of being a reliable debtor or showing you can control your finances.
Always pay the balance off in full to ensure you avoid accruing interest and show that you’re in control of your finances. If you have a good credit card deal with cashback or something similar you can even enjoy a small profit from your spending, too.
To control your credit card spending it is a good idea to use them to pay for something you budget for anyway. Groceries or household bills are a sensible option, as you’ll know you’ve kept the money aside to pay off the credit card in full the next month anyway.
This Business Insider article from 2013 gives good advice on a sensible level of credit card debt in the context of seeking a mortgage with favourable repayments.
Another option is the recommendation to close any unused accounts and credit cards, to ensure that these accounts are completely off your credit record.
Making additional payments can positively influence your credit rating and score
Pay on Time
It’s probably fair to say that a large number of people have cancelled a direct debit instruction so they could reschedule it, or paid a bill a few days late without thinking anything of it.
In their eyes, ultimately the bill has been paid. In financial ‘real terms,’ this is fine, and the creditor will likely have no issue with you, save for any late payment penalty or interest. However, by the time the bill has been paid a credit file will often have already been marked as ‘payment missed’ or ‘payment late.’
What to you seems like the trivial matter of making a $100 payment on Monday instead of Friday could now be having a negative influence on your credit report and score. Admittedly, missing one payment over a period of years is less of a problem than consistently missing payments, but the last thing you need is anything negatively influencing your credit score, no matter how small. This is particularly true if you might be looking to take out a mortgage, a personal loan, or a hire purchase agreement, where criteria may be stricter versus applying for a mobile phone contract, for example.
Pay More Often
Direct debits are great for ensuring that bills are paid on time, and mean that you don’t have to worry about making payments yourself.
Making additional payments can positively influence your credit rating and score though, so if you can make these you should consider doing so.
Extra payments can help for two reasons:
- They show an element of financial planning, responsibility, and control.
- Making them means your outstanding balance will be reduced when your creditors file your status with credit agencies.
The latter point is particularly helpful, as looking like you’re using your full credit allowance each month can make you look financially careless, and you’re unlikely to be accepted for future credit in some cases if you’re already using credit to sustain your lifestyle, rather than as an additional resource.
Staying in Control
The beauty of a credit rating is that while you don’t set your credit score or the criteria against which lenders will judge your application, you are very much in control of how you are seen in the eyes of potential lenders and creditors.
By staying in control of your finances using the tips shared here, and by ensuring your credit report is an accurate reflection of reality, you’ll ensure you have the strongest possible credit rating, and therefore access to the best financial products, deals, and rates on the market.
Disclaimer: This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.