Most people don’t know what their number is, but it could be your ticket towards those next big steps in life.
Vaccine passports are now on the table in Australia. Events are returning, borders are opening, businesses are trading. One would assume this means reclaimed freedom for Australians in all areas of life. But as we resume some semblance of normalcy and begin to plan our future beyond lockdown, there’s one more barrier to be wary of – a poor credit score.
If you’ve yet to reach certain life milestones like purchasing a home or a car, your credit score may not seem that important. In fact, you may not even know what it is or why it’s significant – and you’re not alone.
According to a 2019 survey, approximately 73 per cent of Australians either don’t know their credit score or don’t know what the term means. This is a shocking statistic when you consider how many aspects of life your score affects.
From obtaining a mortgage to applying for a credit card, your credit score plays a critical role in determining your eligibility. If it’s good, it can be the key towards taking your next big step in life. And if it’s bad, it can be a deal-breaker.
Before embarking on the path towards better credit, however, it’s important to understand exactly what this means.
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WHAT IS A CREDIT SCORE?
If you’re new to the concept of a credit score, think of it like a financial passport. It’s essentially a track record of your debts and your ability to repay them. It lets lenders know your trustworthiness as a borrower, which in turn influences your ability to get a loan. Your credit score may also affect how large a loan you can get and what the interest rate will be.
WHAT IS A CREDIT SCORE USED FOR?
Credit scores play a role in most major life decisions, no matter your next chapter.
A good credit score is essential when applying for a business loan, getting a mortgage or even borrowing money to do some home renovations. If you’re making any significant purchase where financing is involved, it will be factored into the equation. But credit scores aren’t just for large loans. They can also be used to determine your eligibility for in-store financing, property rental or even phone plans.
HOW IS A CREDIT SCORE CALCULATED?
Credit scores are calculated based upon your past and pending credit applications; debts (e.g. loans, credit cards) and how quickly you pay them off. In Australia, credit scores typically range in value from 0 to 1000 although some credit reporting agencies go up to 1200. The higher your credit score is, the better your credit history is and the higher your chances are of getting a loan.
THE VALUE OF GOOD CREDIT
Many Australians hold the misconception that avoiding credit altogether is the key to a good score. When you look at the history of credit reporting in this country, the sentiment makes sense.
In Australia, the concept of “good credit” is fairly new. Up until 2014, the only thing that the credit reporting regime took into account was “negative credit” like debts, outstanding loans and other liabilities. Only in the last few years have they begun to factor in positive factors like paying off debts consistently and on time or having a credit card with a low credit limit.
Needless to say, many Australians are still unlearning the idea that all credit is bad – and that the path to better credit is well within their control.
HOW TO IMPROVE YOUR CREDIT SCORE
Before you begin to plan your future out of lockdown, it’s critical to assess your credit score and identify any measures you can take to boost it.
The first step is finding out your current credit score. This can be done easily and for free through digital finance platforms or your broker. Once you’ve received your score, you can determine which credit bracket you fall into. Scores of around 620 and above are considered good. Anything above 800 is considered excellent. Scores that fall below these brackets aren’t great – but they aren’t the end of the world.
These are a few things you can do to improve yours:
- If you don’t have any credit cards, consider getting one. As long as you’re extra careful to pay off your balance on time, it can be a helpful way to increase your overall credit score.
- Lower your credit limit. While having credit history is seen as a good thing, holding a high credit limit is not because lenders will worry about your ability to make loan repayments if you max out your credit card.
- Start chipping away at any current debt. Exhibiting your ability to pay off debts quickly will help boost your score, showcase your financial responsibility and make you more favourable in the eyes of lenders.
- Get in touch with a financial counsellor. Whether you have a bad habit of overspending or simply want guidance on what you can do to minimise your current debts and credit faults, a professional financial advisor can help you get your credit score on track.
If you’re looking to make an important financial decision, your credit score is truly the passport towards your future. Here’s to taking the next step in life.
Published via Society One and News.com.au
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