How Important Is Your Credit Score?
There are few common misconceptions regarding your credit report and overall credit score.
The Myths and Facts About Your Credit Score
Myth 1: A credit score is more important than the credit report.
Knowing the difference between a credit report and a credit score is important.
The key thing to understand is your that credit score is not the be all and end all. The credit score is a number, that’s based on the content of your credit report.
Your credit report however, has all of the vital information in it. Your credit score just distills that information into a number.
It’s very easy to get hung up on your score, but it’s really your report that you need to look at if you’re looking to improve your score. This is what you need to focus on.
Further to this, it is the detailed credit report that a lender will look at when you make an application for credit.
Myth 2: Your credit report just includes defaults and bankruptcies and negative information.
Recently there has been changes to the kind of information that’s included in your credit report. Now in your credit report, will have any loans or credit that you hold. As well as, repayment information about those loans.
It creates a monthly indicator of whether you’ve made your repayments on time. This gives the lender a very clear picture on your relationship with credit. And more importantly, how you behave with credit.
As such, making sure you make your repayments on time every month is the most important thing you can do to improve your credit worthiness. Ultimately, creating your credit score.
Myth 3: Lenders don’t even look at your credit report when you apply for a loan.
Lenders in Australia do now.
The industry is fast transitioning to a more comprehensive type of credit reporting. So, now lenders will look at ALL that information.
While we’re still in the transition mode, and some fringe lenders may still might not necessarily have access to that information, but certainly the major banks are participating.
It now can impact the type of products that are available to you from lenders. For example, you might be able to get a better interest rate if you’ve got a better credit score and a better credit report. That’s a key benefit. As you improve your credit worthiness – you will increase your access to even better products.
A lot of the household name credit providers, as well as the major car financers are now taking into account client’s credit points, and looking at ALL that information before offering credit terms.
Myth 4: I can’t improve my credit score.
There are many ways to improve your credit score.
Looking at your credit report is the single most important thing individuals can do to move towards improving their credit score. It is actually looking at it and getting familiar with it, where you can start taking control.
Far too many people have not actually checked their credit report before. Some have never checked their credit report and have no idea what is actually on it. So, the first thing to do is check it, make sure the information is correct and it’s up to date. And make sure you’re aware of what’s being reported.
You have a right to access your credit report every year for free. Check it out here. It is what is termed a ‘soft’ check so doesn’t affct your credit rating.
Doing this, is about making sure you do everything that you can to take control of your credit reputation. This includes making payments on time. You can then ensure that you build up a good track record of your credit behaviour.
Another key way to ensure your credit report is looking good, is to make sure you’ve only applied for the credit that you need. That ensures your credit score is the best it can be .
NOTE: if you’ve got an unnecessary credit card, it’s worth making sure the limit is appropriate. Or close it – as it will definitely come in to a lenders’ assessment when you apply for another loan if it is open.
Myth 5: Being debt-free means I have a good credit score.
No, it does not.
It’s obviously better than having a default listed against you. But now that we have what we call “positive information” in reporting, which does include the existence of credit products and all repayment history information as well. This can actually help you build up your reputation through having debt.
Reason being, you are demonstrating that you’ve got a good relationship with credit through your repayments.
Showing you have a healthy relationship with credit is key. Lenders take comfort in the fact that you pay on time and can manage your finances well.
It’s not necessarily the case that not having any debt will give you the best credit score. It’s all about whether any information in there shows a good track record of making payments on time.
Myth 6: Potential landlords check your credit report.
There is a common misconception that landlords will look at your credit report when you go for a lease. That’s not neccessarily the case.
Similarly, your rental payments aren’t recorded in your credit report either. It’s just financial services credit that is currently being reported.
Lenders however, do now look at your rental history to check your payment history.
Does a higher income means that you have a higher credit score or you’re more credit worthy?
Myth 7: A higher income means you’re more credit worthy.
Some people believe that how much money they make is included on their credit report. For the purposes of credit reporting, that’s not the case. Your income is not listed on your credit report.
Overall, your credit report is very much about detailing the behaviour you demonstrate with different credit products. So,taking the initiative and accessing your credit report is a wise activity to do each year. Reading what’s included and understanding that behaviour is the first step to improving your credit score. Being prepared for debt is the best thing you can do.
Get hold of a copy of your personal credit file and review your own credit rating. Including any defaults listed against your name. There can be mistakes on your report – make sure you correct them.
Check the Australian Government’s Money Smart Website here for quick links to find out more, as well as, obtaining a copy of your credit report.
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