What Do The Banks Think About Credit Scores
Understanding Your Credit Score Is Critical
Getting your credit score from some online website is one thing, but trying to understand what the score means and how it came to be that way is another thing altogether. Here is our helpful guide to let you know where you stand.
How To Understand Credit Scores
Your credit score is a number between 0 and 1200 that relates to how likely you are to repay debt. Banks and lenders use it to decide whether they'll approve you for a credit card or loan.
What's a good credit score?
Basically, the higher your Credit Score, it is viewed that the less likely it is that you have had an adverse credit event recorded on your file. Lenders will view this as you are being a lower risk for them. The lower your credit score the higher risk you will appear as a potential borrower.
In addition to your Credit Score, most lenders will apply their own lending criteria, so having an experienced Loan Consultant in your corner for this is imperative. Why is it imperative? The more enquiries you make on your file (the more applications you make) the lower your score can become. You want to ensure that you are applying to the best lender the first time, which takes having some knowledge about which lenders are offering the best deal for your individual situation at any one time.
Here is a Guide to Credit Score Ranges
Below average to average (0-509). Lenders view people in this range as more likely to have an adverse event being recorded on their file in the next 12 months. You are in the bottom 20% of Credit's credit-active population.
Average (510-621). If your credit score falls in this range it some lenders will still, consider that it's likely that you will incur an adverse event in the next 12 months. Your score places you in the bottom 21-40% of the credit-active population.
Good (622-725). For people that fall within this range lenders tend to feel that it is less likely to have an adverse event in the next 12 months. You fall in the mid-range (41-60%) of Credit's credit-active population.
Very good (726-832). Most Lenders believe that potential customers that have a credit score in this range are unlikely to have a negative event recorded on your credit file within the next 12 months. Your score places you in the second-highest percentile range of the credit-active population (61-80%)
Excellent (833-1200). At the top of the list is where a lender would feel that it's highly unlikely to have a negative event recorded on your file within the next 12 months when compared to the average Australian. The odds of no adverse events occurring on your credit file in the next 12 months are five times better than the population average and you are in the top percentile range (81-100%).
How is Your Credit Score Calculated?
Type of credit provider. There may be different levels of risk when approaching different lenders. A non-traditional lender may have a different level of risk than a bank or credit union.
The size of credit requested. Both the type and size of the loan or credit limit your requesting can affect your Credit Score. Mortgages have a different level of risk compared to credit cards for example as the lend is view as secured lending against unsecured.
The number of credit enquiries. Every time you apply for a credit product, the credit provider obtains a copy of your file and the application is noted. If you've shopped around for credit and applied at a number of places in one space of time, it flags you as a higher risk. The pattern of credit enquiries over time also affects the level of risk.
Directorship information. If you're a director or proprietor, it may impact your Credit Score so it's important to check both the individual and commercial sections of your credit file.
Age of credit file. The date your credit file was created. A new file may indicate a different level of risk compared to an older file. For example, if you are 45 years old and applying for credit for the first time the lender may feel that you are applying under a new name as it isn't the norm these days that someone goes through life without touching their credit file a few times.
Personal details. Your Credit Score will consider your age, length of employment and how long you've lived at your current address.
Default information. Any personal or business credit such as overdue debts, serious credit infringements or clear-outs could negatively affect your Credit Score.
Court writs. Default judgements or court writs may convey you as an increased risk and negatively impact your Credit Score.
How To Improve Your Credit Score
Your credit score is generally recorded over a 2-year period, so for example payment defaults, court judgments and defaults that are recorded during this period can affect your score. Bankruptcies can take up to 5 years to stop affecting your credit score.
But don't get disheartened, there are ways to manage your credit score and start to improve your credit score over time.
Here are some tips on what you could do to help improve your credit score:
Make loan repayments on time. If you think that you will miss a payment, don't hide from it, let your lender know.
Always pay your commitments on time. This includes but is not limited to your telephone and internet bills, electricity bills, rates notices, water bills. Setting up direct debits can help you not forget to make these payments.
Pay off any outstanding debts or defaults. This can then be shown as paid on your credit file and go some way to helping your credit file look better in lenders eyes as you have then shown intent to pay.
Don't make too many enquiries for credit and limit your applications to when you are in a better credit position. Speaking with a qualified Lending Specialist can help you make some good decisions around this.
Pay off your credit card and store card balance each month and consider lowering your limits. If you don't use that $20,000 limit each month, reduce it to a manageable limit to improve your debt-to-credit ratio.
Would you like to know more about your Credit File?
The team at Fox Home Loans are experts in helping people understand the information on their credit file. We also provide you a copy of your detailed credit file as a free service, because we believe that it's super important to really understand everything they need to know about their credit file and credit score. You can rest assured that speaking with one of our team and having us help you understand your Credit File and Credit Score will not negatively impact on your current score.
As we are not a lender, with your permission, our enquiry that we can make on your behalf to retreive your Credit File does not affect your file in the same way a bank's or alternative lender's does. This is why it is so important to speak with one of our qualified Lending Specialists before you make any enquiries to the bank or any other lenders. It is likely that we will have access to these banks and lenders on our panel anyway, so if you do choose to proceed with a finance application at some point with us, we can help you get the best loan deal from over 50 banks and other lenders that we have access to.
Do You Have Someone in Your Corner?
Fox Property Finance is one of Australia's leading personalised financial service organisations. We have spent many years getting things right so that you can rest assured that you are getting the very best advice available on the market today.
If you would like to know more about what your Credit Score is today, click here to get started!
Learn more about the Author Nathan Drew.