Press Release

What is a credit score and why is it important?

Press Release

A credit score is nothing more than a numerical expression of a person’s creditworthiness. The three-digit number, which is generally between 300 and 850, offers an overview of the consumer’s borrowing history and is typically deployed by banks, credit card companies, as well as other financial institutions to determine the potential risk associated with lending money to that person. To put it simply, the credit score is used to calculate the probability that you will repay your debts. Several scoring models are available, some of them taking into account information such as your income.

In Australia, credit scoring is generally acknowledged as the main method for evaluating a borrower’s financial status. Not only is it used to establish if credit should be approved to an applicant, but also to set limitations when it comes to the contractual agreement. In Australia, the credit score is between 0 and 1200. A good credit score is the number found at the upper end of the scale. More precisely, a score between 622 and 725 is considered good. An excellent credit score falls anywhere between 833 and 1200.

Credit scores were invented in the 1950s

In the old days, there were a great many credit bureaus. The representative had to call and even visit stores to know for sure if a certain customer was paying their bills. It wasn’t the most precise method, but at least it offered a point from which to start. Lenders took a social approach when it came to determining if a lender will default on their debt obligations. Decisions were made based on a character too. This means that a person could walk into a bank with a relatively good credit history and still be refused.

The credit score model that we now know today by the name of FICO was introduced by the Fair Isaac Corporation. All the organisation wanted to do was to create a customary, impartial credit scoring system by eliminating human error and bias. The vast majority of credit bureaus in the United States use the FICO score. If you were to take a close look at other countries’ credit scoring systems, you would have a big surprise. Each of them has its own unique system because there’s no international credit score. In Australia, the most commonly deployed system is the FICO score, which is very much like the Equifax score.

How does the credit score impact your loan’s interest rate?

If you have a bad credit history, you might find it difficult to secure a loan, not to mention that the interest rates might be higher. The interest rate makes a difference to the cost you pay for borrowing the money. Generally speaking, low interest rates are more attractive because the consumer has to pay less money to the bank who has approved the credit. The point is that borrowers offer interest rates based on your credit score. The better your credit score is, the better the interest rate you can get, no matter the type of loan you’re interested in.

Lenders offer a higher interest rate if they see you as being more likely to default on your loan. This means that if you lost your job or was recently forced to declare bankruptcy, you’ll be considered a high-risk borrower. Financial institutions aren’t in the habit of offering credit to borrowers of this kind. If they do, they offer high interest rates and special terms might be imposed. If your credit score is classified as poor, address the issues in your credit past that are negatively affecting your credit score. Repairing your credit score isn’t hard and, most importantly, it doesn’t take months to do it.

Borrowing power: How much money can you borrow?

The borrowing power doesn’t necessarily depend on market activity. It’s your financial behaviour that matters the most. The lender will refuse to offer you the same interest rate they’re advertising on their website. If you’re a high-risk borrower, risk-based pricing is applied. Stricter criteria are introduced to the product and the result is that your borrowing power is reduced significantly. The lender has reason to be concerned with the way you’ve handled your financial situation in the past. It’s recommended to get a copy of your credit report and find out your FICO score.

Sometimes, even with a perfect credit score, you can have a low borrowing power. How so? In addition to the credit score, the financial institution takes into consideration factors such as your income or age. You can have a pretty good idea what products you’re likely to be accepted for, but keep in mind that the final decision is up to the lender. They need to be sure that you’re able to make loan repayments. Having a large deposit and a good credit score doesn’t automatically mean that you’re able to make cash repayments.

Credit score and credit report are two distinct things

Credit score and credit report are used interchangeably, although they refer to completely different things. The credit score refers to the algorithm used to measure your creditworthiness, i.e. how risky or safe you are as a customer. The credit report, on the other hand, is the record containing your credit history and serves as a benchmark. Credit-reporting companies are the ones that put together these reports. Besides lenders, employers, landlords, and insurance companies have access to credit scores and credit reports.

Late and partial payments can have a dramatic effect on your credit score. The credit report will highlight this as a delinquency, so you should do everything possible to make your loan payments. Late and partial payments can stay on your credit report for a long time – more precisely, for about 7 years. Lenders have the liberty to decide what a late payment is and, consequently, report it to the credit bureau. Needless to say, a longer delinquency will have a negative impact on your credit score.

Steps to improve your credit scores

Don’t worry if you have a low credit rating because there are things you can do to mend the situation. Here are a few examples:

  1. Take control of your bills.
  2. Aim for 30% credit utilisation or less.
  3. Don’t close unused credit cards.
  4. Use credit monitoring to track your progress.
  5. Dispute errors on your credit report.

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