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When it comes to credit scores and files, there's a wealth of misinformation around what will and won't leave you with a black mark next to your name.
Here's a guide to help you separate fact from fiction and ensure you will keep the banks saying 'yes'!
What is a credit file?
A record of all your applications for credit - mobile phone plans, interest-free store finance, credit cards, electricity contracts, loans. It includes details of defaults, unpaid or overdue debts, court judgments and bankruptcies.
It also includes repayment history for loans and credit cards, which can work in your favour if you pay on time. HECS debts are not included.
You can request a free copy of your file once a year from a credit reporting agency like Veda or Dun & Bradstreet.
What is a credit score?
A number between 1 and 1200 indicating your creditworthiness, based on your file. The higher the number, the better.
What is a default?
If you don't pay a debt worth $150 or more, it can be recorded on your file as a default.
A default remains on your file, even after you've paid it, for five years, or seven if you're a `clearout', meaning the creditor can't get in touch with you.
What happens if you get a default?
First, check it hasn't been listed in error, says Veda Marketing Manager Belinda Diprose. Second, pay it. It'll stay on your file but a paid default looks better than an unpaid one. Finally, start paying debt.There are companies that claim to clean your credit files on time to show creditors you're trustworthy.
Avoid unnecessary applications for credit (including multiple mortgage pre-approvals) and only increase credit card limits if needed. Applying for lots of credit in a short space of time could suggest financial stress. Pay debts / bills on time, every time.How can you improve your score?
What can a good score do for you?
Some lenders now give special interest rates for customers with excellent credit scores.
What can a bad score do for you?
It may become very difficult for you to get credit.
What if you have a thin history?
Don't go applying for a bunch of credit cards or increasing your credit limit thinking you need to `build' a credit history in order to get approved for a loan - this could negatively impact your score. If your history is thin, lenders will look at how you repay existing debt, and will rely more on what's in your application form.
Can checking your own file / score have a negative impact?
No. Only enquiries by credit providers, following any application for credit, will have an impact.
Tips for a heathly file / score?
- Notify lenders when you move house. You won't be forgiven for going into default because you weren't receiving your bills.
- Check your credit file often - it's better than getting a rude shock when you get knocked back for a loan to buy your dream home. Make sure the information is accurate and if it's not, contact the credit provider or credit reporting agency.
- If you're in dispute with a credit provider, like a phone company, it's best to keep paying the bill and get reimbursed once it's resolved. It's better than getting a default and you can take it up with the relevant ombudsman later if you're unhappy. If you're struggling with bills, talk to your credit provider about it.
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