Why is credit score so important?

Let’s get down to business and answer your most asked questions to find out why it matters and what you could do to improve your score.

Here’s what you need to know.

What is a credit score?

A credit score is the number given to represent your trustworthiness as a borrower. It helps a bank or lender determine whether to accept your loan application, interest rate, credit card limits and more. This number can range between zero and 1200, depending on which agency was used to calculate your score.

Overall, it’s an indication of how risky you are and the likelihood of you repaying the loan. It’s one form of documentation that helps define how well you manage your finances in the eyes of the lender.

There have also been some changes to credit reporting within the last year. It’s a good idea to know what these changes are and what the lenders and credit reporting bodies (CRB) are now looking for. 

Why is a credit score important?

Your credit score is one of the factors that helps a bank or lender determine whether to accept your loan application, how much they’re willing to lend you, and, depending on your score, it could also impact the term and interest rate they will offer.

The lower your credit score is, the higher the risk you are to the bank or lender. The higher the number, the better it looks in their eyes.

Your credit score is an important part of the process when applying for a loan and can say a lot about your financial history. Generally, this includes amounts you have borrowed, applications, enquiries and your record of repaying these loans.

Why can a credit score differ?

When it comes to your credit score, there are generally two scores and they can be different from each other.

The first is the score that is stored with a credit reporting agency. This file is accessible to all credit providers and lenders to help assess your eligibility when applying for a loan. There are multiple credit reporting agencies, so there will also be differences in their scoring systems as there is no universal system.

The second credit report is completed internally by the credit supplier with which you’ve applied. This is their own score, based off the information you have supplied them, where they assess your eligibility for the loan.

Credit scores are only as reliable as the information that was provided. The more information, the more accurate the score will be.

How can I improve my credit score?

If you’re looking for some pointers to help push your credit score in the right direction, have a go at some of these tips to get you started.

1. Stick to the due date

Yes, its common sense but we’re here to remind you that it’s best to pay those electricity, water, phone and credit card bills on time. We know that there can be some leeway and only a tiny late fee – but don’t rely on these advances. Prioritise paying these on time.

You can also set up direct weekly, fortnightly or monthly payments to minimise the ‘bill shock’ of when you receive an unexpected number of bills at the same time. All you’d need to do is pay the remainder.

2. Lower your credit card limit

If it’s possible for you, lower the limit on your credit card. Not only will it help with the excessive spending, but could also help improve your credit score.

Also consider looking for a card with no annual fees, lower interest rate or one that has an initial period of no interest. However, don’t go applying for too many credit cards or loans (keep reading to understand what we mean).

3. Consider the applications number too

It doesn’t just come down to how much you’ve borrowed, or even how many loans you’ve taken out or paying back. Your credit score also reflects how many enquiries and applications you’ve made.

This could appear as a red flag and reflect poorly on your credit score, showing that you’ve applied for a variety of loans that weren’t approved.

Step back and consider if you need the loan or credit card and do some research before applying for every credit card on the market.

There are also some things to keep in mind that could affect your credit score. Read our article ‘3 surprising things that affect your credit score’ that could negatively impact your credit score.

I have a good credit score, but still can’t get a loan…

It’s important to note that your credit score isn’t the be all and end all. It’s only one source of information to help a lender or bank assess whether to approve the loan.

Other factors such as your income, savings records and how well you manage your expenses could help them determine whether you meet its internal assessment criteria. 

What are other benefits of a good credit score?

Some lenders like to offer deals to their customers who have a good credit score and repayment record.

Such perks could include a lower interest rate or higher limits on credit cards, as well as great deals on personal loans. It’s well worth improving your credit score to reap the rewards of better finance offers in the long run.

Most importantly, remember that your local Mortgage Choice broker can provide a copy of your credit record and walk you through what it means for you.