How to improve your credit score

If you’re serious about getting your financial health into shape, a great place to start is with your credit score.

Neglecting your credit score can, quite literally, cost you. This is because when you apply for any kind of personal finance, the lender will take your credit score into consideration when deciding:

1. whether or not they will approve your loan application, and;
2. what kind of interest rate they are willing to offer you.

Borrowers with excellent credit scores are more likely to have their applications approved and be offered the most competitive interest rate available. The reason being is that lenders can have confidence in excellent-credit borrowers’ ability to repay the loan amount, as they have a demonstrated history of positive credit behaviour.

If you have an average or subpar credit score, you may be offered a less than desirable interest rate or have your application rejected altogether.

The good news is, there are steps you can take to improve your credit score before the need to apply for any credit products arises. Consider the following ideas to get started.

Not only is it important to know what your credit score is, it’s also vital that you regularly check exactly what’s on your report. Inaccuracies can occur, but you won’t be able to have them corrected if you don’t know they’re there.

In Australia, there are three major credit reporting bureaus – Equifax, Experian, and Illion – and they are all legally required to provide you with free access to your credit report at least once every twelve months. By taking advantage of this entitlement, you can check for any discrepancies (such as on-time payments misreported as being late) and contact the respective credit bureau immediately to correct the error.

If you don’t make the effort to review your credit report and dispute any discrepancies that may occur, you could be doing your credit score a disservice and in turn be missing out on competitive credit products that you might otherwise be offered.

A task that can save both your credit score and your precious time, setting up automated payments is a simple way to avoid many an unintentional missed payment. Late payments can take a toll on the health of your credit score, particularly if they become a regular occurrence.

There are a few ways you could go about automating your credit card or loan repayments, including:

• Setting up a direct debit with your finance provider
• Setting up a direct deposit from your personal bank account
• Setting a recurring reminder on your phone

Whichever option you choose, you’ll be able rest easy knowing that you’re not simply relying on your memory to protect your credit score.

And keep in mind, it’s not just debts that need to be paid on time. Other bills, like mobile phone and energy bills, can also affect your credit score if you fail to make a payment. So, consider including these in your automations too.

When your credit card bill comes in each month, it might be tempting to simply pay the minimum repayment amount and move on. But it’s important to understand what that could do to your finances in the long run.

Paying the minimum repayment amount on your credit card may be enough to fulfil your obligations as a cardholder, but it likely means you’ll rack up a substantial amount of interest charges over time while only chipping away at the balance owing.

Not only will paying more than the minimum repayment amount allow you to pay the card off faster and reduce the total amount of interest payable, it can also demonstrate a positive credit behaviour on your credit report. Plus, if it helps you get on top of your debt, it may also help to minimise your risk of defaulting and causing damage to credit score.

If you apply for a loan or a credit card and the lender isn’t confident that you will be able to service it, they may reject your application. While this may not directly impact your credit score, the enquiry will be documented, adding to the number of hard enquiries on your credit report. If you subsequently apply for another credit product, and an additional hard enquiry is made, lenders may be wary of the fact you have made multiple attempts in quick succession to access finance.

To avoid having your application rejected, it’s important to do your research and ensure you meet the eligibility criteria for the credit product you’re applying for. There are tools you can use to ensure the amount you want to borrow fits comfortably into your budget, such as RateCity’s personal loan calculator. Making sure your preferred loan amount is serviceable before you apply can reduce your risk of being rejected.

Thanks to comprehensive credit reporting, positive credit behaviours are also visible on your credit file. Prior to the introduction of comprehensive credit reporting, only negative information was included.

You can use this to your advantage by utilising any credit cards you already have. Making regular, timely repayments can show that you are a reliable borrower, while paying more than the minimum amount can also help. Better yet, using a credit card to make purchases and then paying off the balance in full each month could show lenders that you don’t necessarily rely on credit, but use it as a handy financial tool.

If you’ve fallen into a habit of maxing out your credit card each month, or simply spending more than you repay, it could seem difficult to stay on top of your repayments and make a dent in your card’s balance.

One solution you could consider is to reduce your credit limit in order to remove the temptation. A lower credit limit could make it easier to work towards paying down the balance, which would reflect positively on your credit file.

Keep in mind that cancelling a credit card, in some instances, could hurt your credit score. So, be sure to see how this might apply to you before considering that as an option.

If you find that you’re experiencing financial hardship, particularly if you’ve had a change in circumstances such as loss of income, don’t hesitate to reach out to your credit provider. They may be able to work out a solution with you, such as postponing repayments temporarily or considering an alternative payment plan. This could help you avoid harming your credit score by missing repayments.

And if you’re under financial strain and need help getting back on track, consider getting in touch with a free financial counsellor through the National Debt Helpline.