Time to read : 5 Minutes
Are you partial to taking a selfie? Often keen to immortalise yourself in a picture next to an incredible sunrise or iconic site?
It's a snapshot in time, right, of exactly where you are at that moment.
Well, you can think of your credit score exactly the same way. And if this snapshot isn't shiny and attractive, it could cost you big time.
The good news is that just a little bit of financial ‘photo shopping’ – and maybe a bit of ‘filtering’ – can make your credit score beautiful enough to secure a better future.
But let's back up a little bit…
What is a credit score and what makes it up?
For more than a decade now, Australia has had a US-style credit score that is your money self in one number.
This is a dynamic score that ebbs and flows with your every financial move.
It is based on your credit record, which lists most of these moves.
Unfortunately, and frustratingly, the three different credit score bureaus that issue credit scores here in Australia create them on three different scales.
The algorithms that underpin your magic money number are also undisclosed.
However, what we do know is what suppresses or makes your score surge. Which is lucky because your credit score is absolutely vital to your financial future.
It determines whether you're approved for everything from a mobile phone to a loan.
Worse than that though, it can increasingly affect how much you pay in interest. A low credit score could see you charged more, while a high score might mean you will be offered a better deal.
So, you need to protect your credit score – and your financial cred – fiercely.
What makes a credit score lift and dip?
Do you remember getting advice from older friends and family, way back when, that it was smart to get a credit card when you turn 18?
The idea was to get some credit ‘runs on the board’ and show potential finance and loan providers that you are a good candidate for credit.
That's still true to an extent, but there are many more products that achieve the same thing. There’s a good chance your phone contract could well be the first thing that impacted your credit score.
This product is recorded on your report, and feeds into your score, how good you are at honouring your debts and deals.
But how quickly and for how long this is recorded, differs.
Credit contracts
For all credit contracts, there is one set of rules.
Over a rolling two-year period, how promptly you pay is recorded. Every month that you pay your bill or make your repayment within 14 days of it being due, you receive a ‘tick’ in a box.
If you are later than 14 days, not only is this recorded but your score will go down.
This information, because it is recorded for two years, will hurt that score for two years. However, if it remains unpaid…
Unpaid credit and other bills
You get 60 days’ grace with regular bills like utilities, so the rules are a bit more lenient.
But if these – and any credit repayments – remain unpaid after 60 days, and are over $150, a “default” is recorded on your file. This is a serious black mark and will impact your credit score.
What’s more, this information then stays on your credit record and in your score for a full five years… even if you subsequently pay the debt (that will just appear as a note).
Be aware: if the service provider can’t contact you, the default will stay on your credit file for seven years.
“Soft” credit checks
These types of checks are typically not tied to a specific credit application. For example checking your own credit score or getting pre-approval for a credit card or loan.
Soft credit checks are often used for pre-screening purposes. They will sit on your credit file but are not visible on your credit report for credit providers. They do not impact your credit score. Hard credit check on the other hand…
“Hard” credit checks
When it comes to hard credit checks, such as applying for a new loan or refinancing an existing loan – what takes a lot of people by surprise – is that if your credit applications are denied, they can do a lot of damage to your all-important number.
Yes, but... it’s not only when they’re denied, even just a “hard” or official credit check by a lender or other provider – for which you must give permission – can hurt your score.
So, it's important to keep them to an absolute minimum, and if you are rejected, to fix the reasons before applying again.
What happens if you have a bad credit score?
A bad credit score can make things very difficult.
But repair is highly possible (just don’t fall for the type of ‘repair’ that a whole bunch of exploitative operations online are trying to get you to pay through the nose for).
You’re entitled to receive a free copy of your credit score every three months.
Tip: it's a great idea to check it regularly, as this will reveal any identity fraud. It will also reveal any errors.
Errors in theory are easy to rectify… it's just a matter of asking the institution to correct them, and then making sure that correction is recorded on your file and swiftly reflected in your score.
You can obtain an additional free copy of your credit report if you’ve been refused credit within the past 90 days, or want to check if your credit-related personal information has been fixed.
Any dubious money moves, if you've made them in the past, will eventually roll off your score, but you may have to bide your time until you can do much financially.
Remember, no company can access your score unless you explicitly give it permission, which is what happens when you apply for a contract with that company – say a mobile phone or a loan contract.
There is lots of data protection around credit files and scores themselves.
The bigger danger is the risk of fraud mentioned earlier, which is why it's a doubly good idea to stay on top of your rating.
Tip: you can use an app to put a lock on your credit report. Some apps can also alert you of any unauthorised attempts to check your credit which have been successfully blocked.
How can you protect your credit score?
The best way to protect your credit score is by being a model money citizen and with two strategies:
Pay all your bills on time – or at least make sure that you pay any credit or loan repayments within the allowable 14 days. For all other bills, do not be more than 60 days late.
Don't apply for credit too often – each time you give permission to any company to perform an official credit check, it can push down your score a little.
In terms of your actual credit score, it shouldn't be too big of a deal if you are signed up for a whole bunch of credit.
That's even the case if you carry over debt balances that are close to your credit card limits. Having said that, remember where possible to pay down credit card debt to avoid paying interest or getting into financial difficulties.
Be aware: of any person who could sabotage your file and score. Think carefully before issuing a secondary credit card to somebody else. Make sure you trust them implicitly and that they’re good money people. As the primary cardholder, you will be liable for their spending and repayments.
Bottom line
Your credit score is everything to you in money – you need to protect it vigilantly.
A bad credit score can significantly restrict your financial life. Meanwhile, a good one could see you make money moves such as borrowing and gearing up.
The three credit bureaus, to check your score today, are Equifax, Experian or Illion. Because the perfect financial selfie is life changing.
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Financial disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
