Whether you’re planning on becoming a home owner, or simply wanting to take out a new credit card, you may hear a few unfamiliar terms, including credit ratings.
There’s lots of talk about credit ratings, and how important having a good one is. But what exactly is a credit rating, how do you find out your credit rating, and why is it worth working towards having a good one?
What is a Credit Rating?
A credit rating, otherwise known as a credit score, is a number that represents how reflects your reliability as a borrower. The higher the score, the more credit-worthy you are, and the more likely a lender, such as a bank, is to approve your loan or mortgage application.
In Australia, there are three main credit reporting bureaus who maintain credit files on individuals. Each time you apply for a loan, or miss a repayment, an entry is made in your credit file. These entries affect your credit rating, for better or worse. When you next apply for a loan, your current credit rating will indicate to the lender whether you are likely to repay the debt.
While each of the bureaus has slightly different rating scales, you can find out your credit score for free.
Refer to the below credit rating bands to determine the health of your credit rating:
- Excellent: 833 – 1,200
- Very Good: 726 – 832
- Good: 622 – 725
- Average: 510 – 621
- Below Average: 0 -509
It’s important to understand that, along with your credit rating, lenders also consider other factors including your age, length of employment and length of time at your current address. They are generally looking for stability, which would be considered along with your credit rating.
Making the Most of a Good Credit Rating
A good credit rating can lead to a range of benefits. You may want to consider:
- Asking for a discount on your home loan: you are in a better position to negotiate a better rate with your home loan provider, or even have certain fees waived.
- Consider a peer-to-peer loan: a new type of lending where your interest rate is based on your credit score.
- Choose a credit card with rewards: if you are able to repay your credit card in full each month, you might want to consider getting a card with rewards.
How You Can Improve Your Credit Rating
There are a number of ways to improve your credit rating.
- Always pay your bills on time, including credit card balances and loan repayments
- Consider lowering your credit card limits, and closing any credit card accounts you aren’t using (or saving for a rainy day)
- If you don’t have a credit card, you may want to consider getting one. As long as you can pay the balance each month, your good spending and repayment habits will be reflected positively in your credit rating
- Don’t apply for new credit too often. And before you do submit your application, read the terms and conditions carefully to confirm you meet all of the eligibility requirements, to ensure that your application isn’t rejected.
And make sure you seek financial advice before making any big decisions or changes that may affect your credit rating.