Looking for tips and best practices on how to improve credit score? A credit score is one of the most important indicators of your financial health. It informs lenders how responsible you are in managing your loan. The higher your score, the better chance you have to be approved for new loans or lines of credit. With a good credit score, there’s also a possibility of getting the lowest available interest rates when you borrow.
If you’re thinking of getting a loan or you just want to start your financial resolutions, here are some things you can do that can have a positive impact on your credit score.
How is a credit score calculated and how do lenders use it?
When you apply for a loan or credit, a credit report about you is created. Included in your credit report is a rating where your score sits in, such as low, fair, good, very good, or excellent. Every time information in your report is updated, your credit score may change.
Your score is calculated based on this information:
- the loan amount you’ve borrowed
- the number of loan applications you’ve made
- whether you make payments on time
Lenders use your credit score to assess whether to lend you money or you’re considered a risky borrower. Depending on the credit reporting agency (Equifax, Illion, or Experian), your score can be between 0 and either 1,000 or 1,200. A higher score means the lender may consider providing you with credit and a better deal. A lower score may have a negative effect on your ability to get a loan.
You may request a copy of your credit report from any of the agencies for free every 3 months. It’s possible to have a credit report with more than one agency since they can hold different information. You may have to wait up to 10 days to get your report by mail or email. Or, you can access your credit report online within a day or two.
What is considered a bad credit score?
Generally, the average credit score in Australia is 550. Any score below 500 is considered bad. Take a look at these major credit bureaus in Australia and what they consider to be a low or bad credit score.
For Equifax, 0 to 505 is a ‘below average’ score. This indicates that you’re in the bottom 20% of the credit-active population. A score of 506 to 665 is considered ‘average.’
With Illion, it’s possible to get a 0 score, 1 to 299 is considered ‘low’, and 300 to 499 score ‘needs improvement’.
For Experian, 0 to 549 is ‘below average, and considered ‘fair’ is a score between 550 to 624.
How long does a poor credit rating last?
Equifax provides these timeframes for how long different information is kept on your credit report:
- Two years. Repayment history information.
- Five years. Credit inquiries, overdue accounts listed as clear-outs, overdue accounts listed as a payment default. writs and summons, and court judgments.
- Seven years. Overdue accounts are listed as serious credit infringement.
With personal insolvency, debt agreements, and bankruptcy, the time you enter into an agreement and the time it ends can affect how long the information may remain on file. According to Experian, a bankruptcy will stay on your credit report either for two years after discharge or five years from the date of listing.
If you pay an overdue debt, it will be listed on your credit record for five or seven years depending on the type of debt. Although, your credit report will be updated to show you have made payments, which could help to start to improve your score.
How can I improve my credit score?
Having a bad credit score may seem like an endgame for you getting approved for a loan, but here are some best practices that can help to improve your score.
1. Check your credit report for any inaccuracies
Knowing your financial standing is important if you want to improve your credit score. It’s worth checking your credit report to make sure all the information is accurate. There could be errors and defaults listed in it without your knowledge. For example, changing residence could be a reason for lenders to lose track of you and not be able to notify you of any outstanding bill.
Inaccuracies could have a significant impact on your score. Check your credit report regularly for any discrepancies and fix them right away rather than finding out later on when you apply for a loan.
2. Pay your bills on time
Obviously, one of the most important things to start doing is paying your bills on time, or much better, beat the due date. If you have a bill of $150 or more, it can be recorded as a default on your credit report if it’s overdue for 60 days.
3. Pay off outstanding loans or debts
Don’t stress over existing loans and debts by paying them already. Debts appear in your credit report and even paid ones may remain in it depending on the amount and how long it took to be paid off.
4. Seek assistance from your credit provider or a financial counsellor
If you’re finding it hard to manage your repayments, ask your credit provider for financial hardship assistance. Also, seek a financial counsellor for help. They can provide an independent, confidential, and free service, such as developing a budget and negotiating with your lender.
5. Lower the limits on any credit cards
If you keep going over your limit and spending too much using your credit card, it’s a valid reason to request for a lower credit limit. Having a lower credit limit shows you have discipline over your spending. The less money you can borrow, the less debt you have.
6. Avoid applying for any new credit
Applying for a new credit may have a significant impact on your score, whether you got approved or not. Lenders and credit reporting bureaus may frown upon the fact that you applied for another loan being in a risky situation from the start.
Also, closing an account doesn’t make your bad credit score go away. A closed account still shows up on your credit report and may be considered in working out your score. According to NAB “Keeping it open, with no negative reports, will impact favourably on your overall score.”
7. Demonstrate stability
Lenders want to see that you’re a stable character. They want evidence that you have staying power – you’re not here one day, gone the next. Put simply, they want stability on your part so try not to change addresses and jobs too frequently.
Does taking out a loan help my credit score?
Getting a loan can improve your credit score through a debt consolidation loan. It can do wonders to your credit score.
Consolidation can help manage your debts by rolling it all into one loan. Though it adds another loan to your credit report, it also removes the older ones and marks them as fully paid. When the credit agencies see a consistent repayment on the new loan, they may perceive that you’re working to resolve your debt problems. As such, there’s a good chance of improvement in your credit score.