5 ways to improve your credit rating

If you are considering taking out a personal loan or mortgage, or even applying for a credit card, it may affect your credit rating. InfoChoice delivers the lowdown on what your credit score is and how to avoid getting black marks that could affect your borrowing power.

You may not give them a second thought, but credit reporting agencies hold a significant place in your life. In fact, they could be the determining factor in whether your credit card or personal loan application is successful and whether you are able to get the best deals and better interest rates.

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Whether you are successful or not comes down to how good your credit score is.

So what is a credit score?

It’s a number between 0 and 1,000.

It’s a number that indicates how credit-worthy you are: if you are likely to pay your bills on time.

The higher the score, the better your credit rating is, the lower the score and lenders will be less likely to lend to you. They may even charge you higher interest rates on credit and loan products as they see you as a higher risk and more likely to default on payments.

If you have a score of zero and want to get a credit card, forget about it.

A zero score means you have a court judgement, summons or bankruptcy against your name. You may have made too many late payments or defaulted on payments. The only way to improve this score is to pay your debts and bide your time while you build a better score that a lender or service provider might look at.

Any score up to 500 could put you in a too hard basket for lenders. You may also be a in a high risk age bracket: the younger you are, the riskier you are considered.

If you have a score between 700-799, welcome to the average – 41 per cent of Aussies fall into this category. You should be pretty happy with it, but you can do better and it may just be that you need to reduce your number of credit enquiries over a given period of time.

Finally, if you have a score of more than 800, you are one of the top 22 per cent. You are age appropriate, disciplined with your applications for credit and not making too many applications, have a mortgage and/or an investment property and pay your accounts on time.

Has COVID-19 affected my rating?

If you have had to defer payments for COVID-19 related issues and made special arrangements with your loan or service providers, it is unlikely your credit rating will be affected during this time.

If you haven’t made arrangements, the reporting system acts as normal.

Where does your credit score come from?

Credit scores are given to all people who have a credit history. That means if you have ever applied for a personal loan, business loan, variable or fixed interest mortgage or credit card, you will have a credit score. Furthermore, if you have a utility account including gas, electricity or phone, you will also have a credit score.

Your score is delivered to you by way of a credit report that is put together by a credit bureau. The bureau collects, holds and distributes data sent to them by credit providers including utilities, banks, credit card providers and mobile phone retailers that pertain to a borrower's financial history.

There are three credit bureaus operating in Australia:

  • Experian. A data-focused credit agency that enables credit providers to make more accurate credit decisions through data sharing.
  • Equifax. The largest credit reporting agency in Australia.
  • illion. You may know illion better by its former name of Dun & Bradstreet.

What is in a credit report?

Credit reports provide you and potential lenders with information about the credit limits on credit cards you own, your monthly repayments for credit cards, loans, mortgages and other bills, including utilities. It reveals if you make repayments on time and the type of accounts you’ve had and when they were opened and closed.

It’s a comprehensive history of your financial life.

How to improve your credit rating

There are several ways to improve your credit rating. Here are our five top tips:

1. Pay on time, every time

Paying your debts on time, will establish a positive payment history. If a provider can see a disciplined approach to paying bills, you will be likely to receive loans and cards at the best available rates because you have established a positive payment history.

2. Utilise less credit than you have

Familiarise yourself with the term credit utilisation ratio. This is the amount of credit you utilising compared with the amount of credit available to you. The less you utilise, the better your rating. For instance, if you have three credit cards totalling $30,000 and you have to pay those debts each month with accrued interest, you could roll them into a personal loan that gives you one debt and one lower interest rate. You can compare personal loans at InfoChoice’s Personal Loan comparison site.

3. Ditch your debt

Debt isn’t bad. To some degree it is expected. However, the less debt you have and the quicker you pay it off, the better. The bigger your debt, the less likely you are to score the loan you need. It’s as simple as that.

4. Don’t make too many enquiries

Every time you fill an application for any type of credit, lenders will undertake an official check of your credit report. This is known as a hard inquiry and it negatively affects your credit rating. Too many applications is seen as a negative. It’s fine to compare. We encourage you to compare and calculate you