How is credit rating determined and how do I improve it?
Get the lowdown here from Penrith’s finance experts.
It’s all too easy to stick it on the card and think later. But could this snap decision be affecting you in more ways than you realise? Let’s dig a little deeper and shed some light on the situation.
First, what even is credit rating?
Your credit rating or score is a number from 300-800 (FICO scoring system) and majorly affects a lender’s decision to offer credit.
The better the score, the better you look to a potential lender.
Your credit score is based on a variety of factors, including how many active accounts you have, the amount and type of debt and your repayment history, as well as the length of your credit history.
In short, the lender wants to know how hard it will be for them to get their money back.
One important metric is credit utilisation or the percentage of credit you’re using of the total available to you. That’s why we don’t always recommend closing a credit account down if you’re not using it, since this may lower your score.
Why is credit score important?
Ever heard of a subprime borrower? Well, if you’re one of them (with a credit score lower than 640), then your bank will charge a higher-than-normal interest rate on a loan, for instance, on your mortgage. If this is you, stop worrying. We’re going to explain how you go about flipping this around.
On the other hand, if you have a credit score of over 700, you may be rewarded with a lower-than-average interest rate. Over 800 and you’re flying. We all need something to aim for, right?
Credit rating can also affect how much deposit you’ll need to pay on larger purchase items, such as your new iPhone, utilities or rent, and the interest rate or credit limit for your new credit card.
How exactly is credit score calculated?
Let’s break it down:
- Payment history (whether you’ve paid on time) = 35%
- Total amount owed and credit utilsation (percentage of available used) = 30%
- Length of credit history (longer histories are less risky as there’s more info to go on) = 15%
- Type of credit used = 10%
- New credit (how many new accounts you’ve applied for recently) = 10%
I need to improve my credit score fast, is this possible?
As in life, there’s no magic wand that we can wave to wipe the slate immediately clean. Thankfully, there are some easy things you can do to start moving in the right direction.
Like anything worthwhile (and done properly), there’s no magic wand. Work your way diligently through these steps and you’ll be back on top in no time at all.
1. Pay bills on time: Set a reminder, set up direct debits, set yourself the goal to keep on top of payments – your credit rating will thank you (and it won’t take as long as you think).
2. Make more frequent loan repayments: Making more, even smaller but more frequent repayments to existing loans and credit cards will get you to the top of the credit ratings class.
3. Pay debt early: You’ll get top marks with lenders for this sort of A* student behaviour.
4. If you accidentally miss a payment, call them straight away: Don’t cower in the corner, be brave and get on the phone (these people are human beings after all, not monsters – well, most of them anyway). Make a plan and move forward.
5. Fix credit report mistakes ASAP: Contact your creditor or the credit reporting bureau that you ordered your report through to have them removed.
6. If you keep up with credit card repayments, keep the card: Build trust with lenders by proving you can pay up, even if you don’t need the card anymore.
7. Lower your credit limit: If you never go close to the limit on a card, think about lowering it so you stay a good distance from the edge.
8. Demonstrate stability: Try to keep the same address and workplace while you get back to the top of the credit ratings mountain. Once you’re in the clear, then it’s time to pack your walking boots and head on out.
9. Make sure you get post redirected if you change address: Be organised and take control of your situation – it won’t go unnoticed.
10. Don’t get a new credit card if poss: Applying for more credit won’t look great, for obvious reasons.
And on that bombshell, we’re out.
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