What Affects My Credit Score?
and why is my credit score important?
Credit scores are not only used by banks and lending institutions.
Power and telecommunication companies, other institutions or organisations where you may be required to make regular payments for services or products also use your credit score and report to determine whether you are a good risk.
Your conduct and activity affects your score giving you a total rating between 0 and 1000. The higher your score, the less these companies consider you a risk.
How does the score rating work?
This rating fluctuates continually based on your behaviour. For example continually paying your power bill in full and on time will influence your score positively where being late with payments will negatively influence your score.
If your score is under 500
Check to see if you have and defaults.
This is where you have money overdue to someone and are yet to address this and bring payment back in line with your obligations.
The longer this is left unpaid the higher you are perceived a risk so it is important to address these as quickly as possible.
Other information like bankruptcy or judgments will also affect your score.
These still impact your score for 4 – 5 years after your bankruptcy so it is really important to keep everything else squeaky clean to help present a picture that even though this occurred you are not a continued risk.
Too many credit inquires can also lower your score.
This can often be considered by lenders and companies as an indicator that perhaps you do not manage your money well and have no savings discipline due to consistently applying for various credit needs.
You can reduce the number of inquiries by building a savings component into your plan so that you become less reliant on credit and ‘Buy Now, Pay Later’ options.
If your score is between 500 and 900
This is normally and indication that very little negative activity forms part of your score.
It is likely you always pay your bills and any loan commitments on time and you rarely access other credit services (you probably pay cash for most items other people would use short term lending options to pay for over time).
If your score is over 900
Well hey, you’re a very safe risk but this also makes you a very good target for lenders.
That being said chances are you have great disciplines around money, saving for things you want rather than using credit, always paying bills on time.
What can I do to improve my score?
- Avoid making applications for credit as much as possible.
If you are considering borrowing money (for a home as an example) talk with a broker or advisor first to find out what information you need and if there is anything you need to improve or do before you apply.
You are better to get everything correct first and make one application than make several. Every subsequent application is going to negatively impact your score.
- Always ensure your utility bills are paid on time.
If paying the full amount when it is due once a month is sometimes hard to do, pay smaller amounts throughout the month so that the balance left owing can always be paid in time by the due date.
- If you have any existing loans or bills overdue
Contact the provider and make an arrangement to get this back on track as quickly as possible.
These will still have a negative impact on your credit score until they are brought back into line with your responsibilities.
Once on track staying on track will over time start to improve your score again.
- Create a budget that can keep you accountable
Knowing what you do with your money regularly will help you improve your finances.
Without a budget most people are simply reactive to life’s circumstances and this is often what leads to late payments and the need for continually accessing credit.
If you have never used a budget or past attempts haven’t been too successful, check out the Moneytrainer System here.
This is a customised planner designed to help you get your budget right and provide you indicators to help you improve your money habits.