As a nation we don’t have a good understanding of what a personal credit score is and how we can benefit financially by having an untarnished score. Our research found the majority of Australians (82%) have never tried to improve their credit score, while 20% don’t know how to correct their score. Of those who did try to improve their number, the most common tactics were:
- Increasing savings by paying down debt (56%)
- Consolidating debt into a 0% balance transfer card (27%), and
- Taking out a new credit card to establish a credit history (25%).
The age group that was most likely to be proactive about improving their score was Millennials with 34% having tried to correct their number. This is higher than other age groups including Gen X at 17% and Baby Boomers, where only 10% tried to rectify their score.
The problem is that a good credit score can be instrumental in accessing competitive financial deals and helping to protect a financial future, and not having a good credit score can be a huge financial setback.
The gap in our financial knowledge surrounding credit scores is quite confronting. The research found few of us can accurately identify what affects a credit score. A quarter of the survey respondents thought their score could be affected by their bank balance, by checking their score, or by not paying their credit card off in full each month. In reality, none of these factors influences the credit score. However, actions that will improve your credit standing include:
- Obtaining a copy of your credit file to check for any errors, and to identify areas that need improving.
- Ensuring you pay bills and make loan repayments on time. A pattern of late payments is detrimental to your score. Perhaps consider automatic payments.
- Avoiding making numerous credit enquiries in a short space of time. Do your research first, then apply for the most suited options for you.
- Keeping an eye on changes to your report. There are agencies you can register with to help do this.
- Advising your finance providers of any change to your address, credit card details, or financial circumstance.
Here are four ways to benefit from having a blue-chip credit score:
1. Access to lower rates
When applying for finance, a good credit score could mean the difference between a competitive rate or an average rate. For instance, when you’re applying for a personal loan, the lender will review your credit score and an untarnished score and a strong repayment history will probably lead to a lower rate.
To illustrate, if you borrowed $10,000 at 14.5% interest over five years, your monthly repayments would be $235 and total interest paid would be $4,117. However, if you had a good credit score and repaid the loan at 13.5% interest, your monthly repayments would be $230 and total interest would be $3,806. This translates to an interest saving of $311.
2. Increased borrowing capacity
A healthy credit score will also give you greater borrowing capacity, which will come in handy when applying for products such as an investment loan. The lender will review your credit score, credit history, total assets, total liabilities, income and expenses when determining your ability to repay a loan, and set the maximum amount accordingly.
3. Greater choice of financial products
A good credit score will open more doors to the range of financial products available across a wide range of borrowing products.
4. Shorter application process
A good credit score should also speed up the application process as the lender won’t require additional documentation to prove your creditworthiness.
Knowing your credit score and being proactive about improving it can go a long way to helping you achieve your investment objectives.
To access your credit score and to learn more about how it’s calculated, make the most of online tools so you can put yourself in the strongest position to obtain finance and achieve your financial goals.
Bessie Hassan is Head of PR (Australia) and Money Expert at finder.com.au, an independent website providing access to credit scores and how they are calculated.