Learn how to improve your credit score and increase the chances of creditors lending you money.
A credit score is a rating based on your credit history that indicates your ability to borrow money and make timely repayments. Credit bureaus gather all your financial information, including loan and credit card enquiries, current credit accounts, late utility payments, rent history and missed debt payments, to compile a file with your credit history. This file contains all your credit infringements and other things that lenders need to know when determining your financial reliability. Your credit score will determine how attractive you look to credit providers, making it important to improve your score before applying for credit.
What is a credit score?
If you have ever been denied credit by a credit card company, bank or mortgage provider, chances are that your credit score may have played a part. Credit providers look at your credit score and credit history to determine whether you are likely to default on your loan. The score is calculated by credit reporting agencies using your credit history and information gathered from utility companies, banks and other lenders.
Veda, a leading credit bureau in Australia, calculates a score called a VedaScore which ranks individuals depending on their reliability in terms of making payments on their bills and debts. Individuals who get a low VedaScore may have trouble accessing credit and would therefore need to improve their credit score in order to be more attractive to lenders.
How does a credit score work?
Your current credit score is an important number to know before applying for credit. A bad score would contribute to you losing out on opportunities for a mortgage, credit card application or car loan, so it is important to understand it and know what is affecting it.
Veda has a unique credit score, called a VedaScore, that it calculates based on the information on your credit file. This score ranges from 0-1200, with higher ratings indicating better creditworthiness. The score is displayed as a percentage and a number, with Veda saving it into its database using the risk grade broken down below:
- Below average (20% and below). Such a grade indicates to credit providers that an adverse event will most likely occur in the next year. The grading is based on your financial history and shows that you are a likely defaulter or will probably file for personal insolvency or bankruptcy, or that a court judgment is pending which would most likely affect your ability to repay credit.
- Average (21%-40%). Scores that fall under this category indicate an adverse event such as a court writ or judgment or personal insolvency will most likely feature in the individual’s credit file in the next 12 months. The score is based on your credit history and public records as compared to other credit-active Aussies in the Veda database.
- Good(41%-60%).This score range indicates that the odds of an adverse listing appearing on that credit file are better than for most of the credit-active population on the Veda database.
- Very good (61%-80%). This rating indicates that the odds of an adverse event happening are two times less likely than for other members of the population with credit histories. That gives lenders more confidence when approving credit.
- Excellent (81%-100%). The odds of an adverse event happening are around five times less likely than for other credit holders in the Veda database, indicating a near perfect eligibility for credit within the next 12 months.
How is my score calculated?
Your VedaScore indicates the likelihood of a default or clearout occurring within the next 12 months. It is calculated based on the following information in your credit report:
- Type and size of credit requested. Your VedaScore will largely be determined by the risk associated with the type of credit requested in your loan application. The credit limit or loan amount you request will also determine your credit risk index and affect your final score.
- Number of credit enquiries. Any time you make a loan, credit card or utility application, your credit provider adds an enquiry into your credit file. Frequent applications for credit raise your risk index, lowering your credit score.
- Pattern of credit enquiries over time. Many credit enquiries within a short period of time may be unattractive to lenders as they raise your risk of defaulting. Defaults and other serious infringements in your credit history also affect your score negatively.
- Age of your credit report. Veda takes into account how old your credit report is in determining your credit risk. A relatively new credit report indicates a higher level of risk as creditors don’t know much about your financial reliability.
How do I improve my credit score?
There is a lot you can do to improve your credit score and better your chances of being approved for credit. Since your credit score is based on your credit history, it may take time to build your profile, but the decision to have a healthier score must begin today so that you benefit from a better credit score in the future. Here are a few simple things you can do to raise your credit rating and look more attractive to lenders:
- Redirect your bills when moving. To prevent your bills from being listed as defaults when you change your address, ensure that you provide your new address to banks, utility companies, phone companies and other lenders so that your bills are redirected to the new address.
- Pay your bills on time. Missed or late payments on some credit contracts (for example, home loans, personal loans and credit cards) can affect your credit score negatively, so ensure that you make minimum payments on all your debts on time.
- Consolidate your debt. Consolidating several loans into one can make it easier to manage repayments and ensure that you save on individual loan fees that could be making credit more expensive.Learn more and apply for debt consolidation here
- Check your credit report regularly. This will help you monitor your credit applications so that you flag any applications or enquiries made as a result of identity theft.
- Do your credit homework. To avoid getting into unnecessary debt, only apply for credit when you need it, and remember to arrange for a repayment plan that suits you to avoid missing repayments. It also helps your credit score if you space out your credit inquiries.
Why is it important to check my credit file?
Checking your credit file regularly is important as it helps ensure that everything is in order in your credit report and that your credit score remains healthy. You should order and review your credit report to:
- Check that all your personal details are entered correctly in your file.
- Ensure that all loans and debts listed are actually yours and that you have not been a victim of identity theft.
- Check for incorrect defaults or debts listed twice and request corrections or for notes to be added to the report.
How can I deal with incorrect listings on my credit file?
You have the right to update your credit report in order to remove outdated or incorrect listings.
If you discover errors about your personal details, including if adverse listings have been entered twice, you should contact the credit reporting agency from which you ordered the report and request them to make amendments.
Other errors, such as wrongly listed defaults, can be dealt with by contacting a credit repair company who can act on your behalf to investigate and help remove adverse information from your report. There are also free Ombudsman services for additional help.
Order a copy of your credit file
Receive email alerts whenever specific changes occur on your credit file for 12 months. You also receive a copy of your credit file despatched within one working day.
Receive your credit file with information on:
- Details of consumer credit enquiries
- Details of overdue consumer credit accounts
- Commercial credit enquiries
- Details of overdue commercial credit accounts
- Bankruptcy & Court Judgements
- Writs & Summons
- Information on your current relationship with a credit provider
- $79.95 p.a. annual fee
Frequently asked questions
How does my credit score impact my credit application?
Lenders depend on credit scores from top credit bureaus in Australia to determine whether you are likely to default after accessing credit. A bad credit rating indicates the possibility of an adverse event occurring in your credit file in the coming months, thus making lenders deny you any form of credit due to your high credit risk index.
Can creditors make erroneous listings on your credit report?
Yes, creditors tend to sometimes list a default onto your file when in fact the debt is in dispute, or list defaults without giving you the required notice that your account is due. This is why you should monitor your credit file yearly and dispute any wrong listings with the help of a credit repair agency.