What are the advantages of a good credit score?
While having a bad credit score isn’t the end of the world – after all, you can improve it over time – but it can make life that little bit harder. It can also make it more expensive as lenders can see you as being riskier than someone with a good or excellent score and will adjust interest rates to reflect this.
In Australia, credit scores range from 0 to 1,100 or so. A credit score of zero probably means you’ve never had a credit agreement before so there’s no information on you. The main credit reporting agencies have scales that are roughly similar.
Anything between zero and 500–550 is poor, with 550–650 being fair or average. From 650-750 is good, with 750–850 being good and anything above that is excellent. It’s important to find out what your score is as you’ll know where you stand with lenders and utility providers. You might also find out how you can improve your score to take you into the next band up.
These are the advantages of having a good or excellent credit score, so you have an incentive to achieve one.
You’ll get lower interest rates on loans, credit cards and even mortgages
When you borrow money, you pay interest on it because that’s one of the costs. The interest rate you’ll get on your agreement is almost always related to your credit score. The higher your score, the lower the rates you’ll pay (usually, anyway). You’ll probably also pay lower monthly maintenance fees and establishment costs. This means you’ll pay down your debts faster and have more money spare.
When you apply for a personal loan, you’ll often see that the headline interest rates start fairly low. The Harmoney Unsecured personal loan starts off with rates of 6.99 (comparison rate 7.79 per cent p.a.) per cent p.a. and goes all the way up to 26.65 per cent p.a. for applicants with poorer credit records.
You might also see that some loans only accept applications from people with excellent credit. The Now Finance Unsecured personal loan offers an interest rate of 7.45 per cent p.a. (comparison rate 9.07 per cent p.a.) for excellent credit applications. Its highest rate goes up to 16.95 per cent p.a. which is almost ten per cent points lower than the Harmoney product.
You’re more likely to be approved for credit
If you have a poor rating, you’re more likely to be rejected by lenders when you apply for credit as they may see you as too risky. A good or even an excellent score isn’t a guarantee of approval, but it certainly makes it more likely. You can apply for new products with more confidence.
You have more negotiating power
If you have a good or excellent score you might be able to negotiate an even lower rate on a credit product as a result. You might prefer the extra features of one loan, but prefer the interest rate on another, for example. Your great credit rating can be used to persuade your preferred lender to lower the rate on the loan with the good features in order to secure your business.
You can apply for higher limits
The amount you can borrow isn’t just based on your income, it’s also based on your credit score. Lenders are more likely to offer you higher credit limits because you’ve demonstrated the fact you can handle them consistently and sensibly. Having a bad credit score may mean that you have lower credit limits – until you prove yourself, at least.
It’s easier to apply for rental properties
An increasing number of landlords use credit scores to screen potential tenants. Having a bad score can either reduce your chances of securing a rental property or result in you having to pay a higher deposit or use a guarantor. A good or excellent score literally opens more doors for you.
You can get better car insurance premiums
Car insurance companies also use your credit score to work out your premiums, with bad credit applicants paying a few extra dollars each month. As you’ve probably worked out by now, having a better credit score means lower premiums.
You’ll have more options for mobile phone contracts
A better credit score means that you’ll be more likely to be able to get a hassle – free mobile phone contract with better terms and more models available to you. Poorer scores may result in you having to pay a larger upfront deposit, or being restricted in your choice of model and upgrade. In the worst–case scenarios, you might not be able to get a phone contract at all and have to use a pay as you go service instead.
You might get cheaper deals on utilities
Most Australian energy and gas suppliers do check your credit score when you sign up with them. They’re unlikely to refuse to provide you with gas or power unless you have a particularly dire record and they can’t charge you more than their standard rate because of your history. However, you might not be able to get the cheapest deals and some providers might ask for an upfront deposit to secure the contract.
There are ways to improve your credit score
If you know that your score isn’t great, it’s important to find out what it is and to take steps to make it better. You might find that there are outdated or even incorrect listings on it, for example. If these are removed, you score will rise. You can also use direct debits to pay your bills on time, or bundle any outstanding debts into a debt consolidation loan as these are often cheaper and easier to handle.