Knowing what affects your credit score is very important because lenders check your credit rating when you need money for a personal loan, a car loan or a mortgage. Understanding these factors can help you fix your negative habits and make a plan to improve your rating.
In 2018, Australia passed a major legislative reform that changed the nation’s Credit Reporting System. Previously, only negative borrowing patterns, such as defaults or late payments, impacted your credit score. However, the new legislation made the factors that affect your credit score much more comprehensive, including accounting for positive actions (such as paying bills on time).
What Affects Your Credit Score?
1. Paying Bills on Time
Perhaps the most crucial factor of all is paying your bills on time. A single late payment shouldn’t impact your score too much, but a pattern of missed or late payments shows that you are an unreliable borrower.
Wondering what payments affect your credit score? Your credit report displays any revolving or instalment payments that are tied to your score. Typically, these can include mobile phone plans, mortgage payments, credit card payments, loans and car payments.
Tip: Can child support affect your credit score? The answer is yes! Late or missed child support payments can impact your credit score.
2. “Hard” Enquiries
When you sign up for a new credit card or apply for a loan, the organisation will often pull a credit enquiry before the approval. There are two types of enquiries: soft and hard. A soft enquiry checks your credit rating but won’t sit on your credit report.
Hard enquiries are a formal check into your credit score and appear on your credit report. Having too many hard enquiries on your report within a short time can negatively impact your score. That is because it can look like you were desperate for credit. Hard enquiries stay on your file for up to two years, so make sure to space them out as much as possible.
3. Credit History
The older your credit history, the more information credit bureaus have on you and can understand your patterns. Relatively new credit history doesn’t supply enough data, so there’s no telling how risky you are as a borrower.
One important tip is to never close your longest standing credit card. Even if you don’t use this card anymore, don’t cancel it. Simply make one purchase per year and pay it off immediately to keep it active.
4. Checking Your Credit Report Often
You may be surprised to know that mistakes can sometimes be what impacts your credit score. This is especially common for people with popular name combinations. If you’re a “John Smith,” another John Smith’s credit factors may accidentally show up on your report.
You can get a free copy of your credit report from Equifax every 12 months. Order it annually and review it for any mistakes. You can open a case to have items removed on your report that are incorrect.
5. Credit Limit Usage
To increase your credit score, you want to show lenders that while you have access to credit, you don’t spend it all. If you have a $1,000 credit card, spend the entire amount and pay it off every month, that is still not considered a positive spending habit.
Ideally, you should be spending 30% or less of your available credit every month.
6. Good Debt vs. Bad Debt
Some forms of debt can actually increase your credit score. If you have debt that you pay on time, in full or with additional payments, it shows you’re a responsible borrower. However, this only applies to “good” debt. Some examples of “good debt” are student loans and home loans. On the other hand, having quick cash loans is considered “bad debt,” as it shows you were desperate for money.
Just a few of these small changes can result in a drastically improved credit score.