Want to get better financial outcomes in 2022? Then you might want to work on improving your credit score.
You might not realise that lenders make different offers to borrowers with different profiles. As a general rule, if you’re deemed a lower-risk borrower, you’re more likely to be offered better loan products, lower interest rates and more enticing deals. Conversely, if you’re deemed a higher-risk borrower, your options are likely to be more limited and less attractive.
Lenders assess your risk profile in a number of ways – one of which is your credit score. The higher your credit score, the less risky you’re deemed to be.
So what steps can you take to improve your credit score in 2022?
To answer that question, you first need to understand how credit-scoring.
Australia operates under a relatively new system called ‘comprehensive credit reporting’, which means banks and other credit providers (such as utilities and telcos) have to report all your positive and negative credit actions to the three main credit bureaus.
The credit bureaus keep a record of how you manage credit – which is known as a credit report. They then use this information to grade your ability to manage credit – which is known as a credit score.
In other words, all your credit actions are reflected in your credit score. So if you want to improve your credit score in 2022, you need to maximise your positive credit actions and minimise your negative credit actions.
Here are seven specific steps you can take:
When you take out home loans, car loans, personal loans and other types of loans, it’s important you make all your repayments on time and (eventually) pay off the debt. That will reassure lenders you’re good for future loans.
Similarly, if you pay your electricity bills, water bills, internet bills and other bills on time, you’ll establish a reputation as a reliable consumer.
Nobody should ever take out a credit card if they don’t feel it’s appropriate for their personal circumstances. However, from a credit score perspective, having a card is generally better than not having one, as it’s a running example of your ability to manage credit – assuming you make your repayments on time. Paying off your entire debt in full each month is a more positive credit action than just making the minimum repayment.
There’s nothing wrong with applying for credit from time to time. But if you frequently sign up for new loans, new credit cards and new phone plans, that might create the impression you’re financially reckless. So if you want to maximise your credit score, you need to limit the number of credit applications you make.
Similarly, if you keep moving from job to job and rental home to rental home, that might create the impression you’re unreliable – and banks don’t like giving loans to unreliable people. To maximise your credit score, limit your changes of employment and address.
Saving money will also put upwards pressure on your credit score. If a salary is regularly paid into your bank account and if your savings steadily increase, you’ll demonstrate you’re good with money and able to repay loans.
Ask one of the credit bureaus for a free copy of your credit report. (You’re entitled to one free copy per year.) Why? Because it might contain errors that are unfairly impacting your credit score. If your credit report contains negative entries that are accurate, there’s nothing you can do. But if it contains negative entries that are inaccurate, you can apply to have those errors removed.
Establishing and maintaining a high credit score is an ongoing, long-term process.
As a general rule, you can’t expect to significantly improve your credit score with just one or several actions; instead, you need to do lots of positive actions over months or even years.
The good news is that doing more credit-positive actions will deliver two big benefits.
First, it will improve your finances, because you’ll no longer have to pay late fees or penalty interest. Second, it will increase your chances of lenders offering you better loan products, lower interest rates and more enticing deals.
To discuss your options, you can call us on 1300 416 700, email us on info@shorefinancial.come.au or fill in this online form.
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