One of the greatest perks in life is access to credit. It opens the doors to many important financial decisions, such as house and lot financing. However, before you can get a loan approved in Australia, your credit score or credit rating needs to meet the requirements.
In this article, mortgage experts What If We Finance discuss the following:
- What is a credit score?
- How does a credit score indicate creditworthiness?
- How do you know if you have a bad credit rating?
What is a credit score?
Your credit score is a statistical number that evaluates your creditworthiness. In other words, it measures your ability to repay a loan in a reasonable time with reasonable terms. Most lenders in Australia use credit score ratings of a potential borrower to assess the individual's ability and probability of repaying debt.
Your individual credit score ranges anywhere from 300 to 850. The higher your credit score, the more financially trustworthy you appear in the eyes of banks and credit unions.
How does a credit score indicate creditworthiness?
Having a good credit score is crucial as it determines your loan eligibility. If you have a good credit score, banks and other lenders are confident that you will be able to pay off the loan according to the terms of the agreement. This also works for other mortgage options such as home loan refinancing.
Australians, especially those who have just recently gotten access to credit, need to start being conscious and aware of their credit behaviour. Their credit behaviour will ultimately affect their ability to make future investments and eligibility for credit. Each time you set major financial goals, such as a holiday or buying a new home, your credit score is going to form a part of your entire financial history.
So, how does a credit score indicate creditworthiness? Establishing and maintaining a good credit score lets you enjoy the following benefits:
- Improved chance for loan approval - With a good credit score, you can apply with confidence for the mortgage that best suits your requirements and financial situation.
- Low interest rates on loans - If you have a good credit score, you're most likely to qualify for the lowest interest rates and pay lower finance charges on mortgages.
- Better negotiating power - Good credit score provides you with a great opportunity to negotiate lower interest rates for your mortgage.
- Approval for higher limits - Banks will typically let you borrow more money if you have a good credit score. That's because you've demonstrated that you're creditworthy and you can pay back what you borrow on time.
How do you know if you have a bad credit rating?
Banks, lenders and other financial institutions in Australia each have their own processes and standards for rating credit scores. While they won't exactly disclose their internal processes of computing credit scores, here are some indicators on how banks check the creditworthiness of a customer.
- Payment history - shows all the payments you make with a bank and also indicates whether you've been paying on time or not.
- Amount owed - shows the balance you still owe to your bank. If you frequently max out your credit cards, you likely delay your payments compared to those who borrow within reasonable limits.
- Length of borrowing money - gives an estimated timeline on how long you've been paying for a specific loan.
- New credit - shows the number and frequency of new accounts created with the financial institution.
- Types of credit used - banks and lenders check if you have multiple accounts such as a personal loan, a car loan or a business loan.
Credit scores typically range from 300 to 850. Traditionally, people with scores of 579 or lower are regarded to have bad credit. Credit scores between 580 and 669 are labelled fair. Those with scores 670 and above are the ones who won't have trouble securing loans and enjoying lower interest rates.
How do you know if you have a bad credit rating? You can get your credit score and report for free from agencies such as:
You have a right to get a copy of your credit score and credit report for free every three months. To keep track of your credit rating, it's best to get a copy at least once a year. You can typically access your credit report online within a day or two. You can also wait to receive your credit report after 10 days via mail or email.
To learn more about topics such as “How does a credit score indicate creditworthiness?” don’t hesitate to contact What If We Finance today.