It is a known fact that credit scores are a vital way to assess a company’s borrowing history as well as an individuals, but the truth is that most of us don’t know how to properly track and manage our personal and business score. So how can you?
In Australia we have a negative credit score system, which means that it records the bad but not the good. Every time you pay late, default or apply for credit your score gets affected. In order to know how to manage your score, you need to know what is made of:
- Credit Enquiries: This is one of the biggest misunderstandings people have, as consumers there is a lot of incentives for us to apply to different credit cards and consequently get certain amount of points or frequent flyer miles. The issue is that every time you apply for a card, loan of credit of any sort there is a charge put in your file. Hence deteriorating your score. As the lending business moves from person based to algorithms these scores are going to be a big part of whether you can actually get a loan or not. I.E when your review is done by a person, most credit analyst understand credit enquiries as sort of window shopping for credit, however algorithms work based on numbers and formulas.
- Adverse on file: Adverse on file just means if you have had any issues recorded on your file, all the way from defaults, bankruptcies, court orders, repayment plans, etc…All these affect your credit score negatively.
- Defaults: defaults are recorded in your file when you fail to repay the minimum amount due on your credits, normally is recorded after you have more than two months overdue. It is important to note that defaults does not mean you cancel your loan or you declare insolvency, they are very different charges, and affect your score differently.
- Insolvencies and actions: Insolvencies and actions is the most critical part of adverse charges on any file. These mean that you were unable to fulfill your commitment to pay a particular loan or credit transaction, consequently the financial institution closed the credit/loan and made a loss. Once you declare insolvency is very hard to clean your record as it can take a substantial amount of time and effort to build it back
These two areas (Credit queries and adverse charges) are what drives your credit score up and down. So how can you keep track of it and improve it?
- I highly recommend you subscribe to Credit Savvy, it is a a great way to know your personal score and what are the different things recorded in it.
- Assess it and correct if there is anything wrong.
- Do not apply to a lot of cards, use credit card comparison pages such as Credit Card Compare or Credit Savvy itself, once you know which card is best then apply for that one.
- Make sure you can afford your repayments.
- Don’t repay too much money unless you know you can manage it, keep it simple, repay just above the minimum payment but don’t go crazy, use credit as such. As we said Australia does not record your positive charges, only the negative ones, so repaying a lot of money won’t benefit your score. Of course, if you are able to manage to repay a large sum then go for it, you will be able to save interest!
- Keep track of your score every 6 months, and work to improve it. The better it is the more benefits you are going to get from your financial institutions and lending parties.