Understanding How Credit Score Is Scored

Understanding why Credit Score is important & how they are scored & how to manage CCR effectively!

 

An understanding of your Comprehensive Credit Score, which is one of the most important measures of your financial health & well being, given the changes in the lending land scape by banks & lenders whereby your eligibility for a loan or a credit card along with a huge saving on interest rates offerings by lenders with a potential savings that you could take advantage off, this article is to help create awareness & benefit one & all on maximising savings.

The Why?

A credit score (Equifax – CCR (Comprehensive Credit Score) helps tell lenders at a glance how responsibly you use credit. The better your credit score is, the easier you will find your loan or Credit Card to be approved or lines of credit. A higher credit score can also help open the door to lowest interest rates offered by banks along with Low Loan to valuation ratio in case of home loans.

It comprises of the following mix:

• Payment history (35%)
• Credit usage (30%)
• Age of credit accounts (15%)
• Credit mix (10%)
• New credit inquiries (10%)

The How?

1. Review Your Credit Reports

To improve your credit, it helps to know what might be working in your favour (or working against you). That’s where checking your credit history comes in to play.

Pull a copy of your Credit Report from Equifax (Previously) Veda Advantage credit bureau. You can do that for free through https://www.equifax.com.au/ website, Equifax Score (formerly Veda Score) will be a number between 0 and 1200. A “good” credit score is between 622 and 725, a “very good” score is between 726 and 832 and an “excellent” score falls between 833 & 1200. Then review each report to see what’s helping or potentially hurting your score.

1. Factors that can contribute to a higher credit score include a history of on-time payments, low balances on your credit cards, a mix of credit card and loan accounts, older credit accounts, and minimal inquiries for new credit. Late or missed payments, high credit card balances, collections, and judgments can be major credit score detractors. Review all negative factors in the report and focus your attention on improving them, such as paying bills on time or reducing debt.

2. Get a control on Bill Payments

Equifax credit score are used by more than 90% of top lenders, and factors that can contribute to a higher credit score include a history of on-time payments, low balances on your credit cards, a mix of credit card and loan accounts, older credit accounts, and minimal inquiries for new credit. Late or missed payments, high credit card balances, collections, and judgments can be major credit score detractors. Review all negative factors in the report and focus your attention on improving them, such as paying bills on time or reducing debt.

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As you can see, payment history has the most impact on your credit scores. That is why, for example, it’s better not to have paid-off debts, say of your student loans, expunged from your record. As long as you have paid off your debts responsibly and on time, it works in your favour. Thus, a simple way to improve your credit score is making sure to avoid late payments at all costs. Some tips that you can do to improve your credit score are & include:

• Creating a filing system, either paper or digital, for tracking monthly bills
• Setting due-date alerts, so you know when a bill is coming up
• Setting up direct debit to pay bills from your bank account.
• There’s one other option, charge all your monthly bill payments to a credit card.

This strategy assumes that you’ll pay the balance in full each month to avoid any additional interest charges or bills from defaulting. Going down this route could help simplify bill payments and improve your credit score if it results in a history of on-time payments.

 

3. Aim for 30% Credit Utilization or Less

Credit Utilization is the amount of your credit limit you’re using at any given time. After payment history, it’s the second most important factor in Equifax credit score calculations. The simplest way to keep your credit utilization in check is to pay your credit card balance in full each month. As this not only helps you use credit for free, earn reward points, save & earn interest on your money by depositing them in an interest-bearing account.

If you can’t always do that, a good rule of thumb is to follow credit usage on your credit card by keeping total balance at 30% or spend less of your total credit limit. From there you can work on whittling that down to 10% or less, which is considered ideal for improving your credit score. Use your credit card’s high balance alert feature to keep tabs on your balance so that you can stop adding new charges, there’s one other thing you can do to improve your credit utilization: Ask for a credit-limit increase. Raising your credit limit can help your credit utilization, as long as your balance doesn’t increase in tandem.

Most credit card companies allow you to request a credit-limit increase online; you’ll just need to update your annual household income first. It’s possible to be approved for a higher limit in under a minute; the credit card company may do a soft pull of your credit score first as part of the process. You can also request a credit-limit increase over the phone or by an email to your bank on their web site.

 

4. Limit Requests for Credit: Soft Inquiries vs. Hard Inquiries

A soft inquiry is a credit check that does not affect your credit score. These include checking your own credit, giving a potential employer permission to check your credit, checks done by financial institutions with which you already do business, and credit card companies that check your credit to determine if they want to send you pre-approved credit offers.

Hard inquiries, however, do affect your credit score—adversely—for anywhere from a few months to two years. These occur when you apply for a new credit card, a mortgage, a Car or Personal loan, or some other form of new credit. The credit bureaus assume that your request for additional credit means that you are at a greater risk of not paying off your current debts, so if you are trying to improve your credit score, it’s best to avoid applying for new credit of any kind.

Shopping for new credit on your own can have a negative impact on your credit score & can also be viewed by lenders as high risk (phishing is a term where scammers try to rob/cheat, hence when you shop for credit your credit score will capture all the enquires thus attributing to Phishing) but If you are shopping for a mortgage, a car loan or a credit card, lenders typically pull your credit report to see if you qualify and to determine the rate they will charge. Too many inquiries over a period of time can negatively impact your score, but if you cluster these applications within a few days or a week, the CCR scoring system will recognise that you are comparing rates for a single new loan or credit card rather than attempting to open multiple new lines of credit or phishing.

 

5. Make the Most of a Thin Credit File

Having a thin Credit file means you don’t have enough credit history on your report to generate a credit score. An estimated 6-8 million Australians have this problem. The good news is that there are ways to build your Thin Credit file and improve upon your credit score.

Have a mix of credit types. CCR (Comprehensive Credit Score- Equifax) prefers to see consumers with both personal loan / home loans and credit cards. If you are repaying Personal/student loans or have a car loan or a mortgage, then having one or two credit cards is a good idea. While having too many credit cards can be a negative factor, you should have at least one to prove you can handle credit appropriately.

A third option applies to renters. If you pay rent monthly, there are several services that allow you to get credit for those on-time payments. REIV& Rent Tracker, for example, will report your rent payments to the credit bureaus on your behalf, which in turn could help your score. Note that reporting rent payments may only impact your Equifax credit scores. Some rent reporting companies charge a fee for this service, so read the details to know what you’re getting in to.

 

6. Keep Old Accounts Open and Deal with Delinquencies

Your credit age represents the average age of your credit accounts. The older your average credit age, the more favourably you might appear to lenders. If you have old credit accounts you’re not using, don’t close them down. While the credit history for those accounts would remain on your credit report, closing credit cards while you have a balance on other cards would lower your available credit and thus increase your credit utilization ratio. That could knock a few points off your score. And if you have delinquent accounts, Charge-offs, or collection accounts, take action to resolve those first. If you have an account with multiple late or missed payments, for instance, caught up on the past due amount, then work out a plan for making future payments on time. That won’t erase the late payments, but it can improve your payment history going forward.

If you have charge-offs of collection accounts, decide whether it makes sense to pay off those accounts in full or offer the creditor a settlement to pay out & close these accounts in collection. Newer Equifax credit-scoring models assign less negative impact to paid collection accounts. Paying off collections or charge-offs might offer a modest score boost. Remember, negative account information can remain on your credit history for up to seven years, and bankruptcies remain for 7-10 years.

 

7. Use Credit Monitoring to Track Your Progress

Credit Monitoring Services Equifax e.g. get your credit score, or simply get your credit score are an easy way to see how your credit score is changing over a period of time. These services, many of which are free, monitor for changes in your credit report, such as a paid-off account or a new account that you’ve opened. They typically also give you access to at least one of your credit scores (from Equifax), which is updated monthly. Here’s another good reason to use credit monitoring: It can help you prevent identity theft and fraud. For example, if you get an alert that a new credit card account is being reported to your credit that you don’t remember opening, you can contact the credit card company to report of a suspected fraud. (By Merrilyn Mansfield)

It is important to understand that credit repair can help you not feeling hopeless & guiding you in the right direction.

Credit repair is often portrayed as a dark art, but the concept is actually simple: once you learn the mass of relevant industry regulations, you discover the different buttons you need to push in different situations. So, credit repair is actually a science, rather than an art.

Here are five credit repair secrets that no one will tell or disclose that will help you get your credit score back.

 

1. Only incorrect listings can be removed

There are two reasons that may have damaging listings on your credit file – they were either correctly placed or incorrectly placed.

Unfortunately, credit providers won’t remove accurate information from a credit file. But they will remove an inaccurate information, provided you know how to work with them.

 

2. Credit repair can’t be done overnight

Removing incorrect listings is a process can take weeks, not days.

While a good credit repair agency will move fast even at a cost, they will have to liaise with credit providers on your behalf – and these providers can be big, bureaucratic organisations that operate at a slower pace, hence plan in advance.

 

3. Creditors are willing to negotiate

Credit providers often take a pragmatic attitude to debts, so they might be willing to offer clients friendlier payment terms, or even cancel some of their debt, provided you are proactive & willing to work with them.

This sort of informal negotiation spares credit providers the hassle of chasing someone for money.

 

4. Part 9 Debt Agreements aren’t panaceas

Part 9 Debt Agreements are a formal renegotiation. Again, they usually involve credit providers accepting less money under a new repayment schedule, this is the biggest downside to Part 9 debt agreement.

This time, though, your name will be entered on the National Personal Insolvency Index and the agreement will be recorded on your credit file, severely damaging your borrowing prospects for at least five years.

 

5. Consumers can solve problems themselves

You might not realise that you can do your own credit repair without engaging an agency or paying any money (Self Service Option).

True, you might find it complicated, stressful and time-consuming. But it won’t cost you a cent.

If you have had trouble managing your credit in the past or experienced a financial crisis, it may take a little time to re-establish good credit. The best way to do this is to pay down existing debt, open new accounts sparingly and make all payments in full and on time.

The importance of your credit score cannot be overestimated. Boosting your score by 10, 50 or 100 points can save you money by enabling you to qualify for the home / Personal or Credit Card rates and lowest loan rates from mainstream confirming lenders as compared to non-confirming lenders.

 

Key Take Away:

Improving your credit score is a great goal to have apart from the importance it would have someone with a low credit score of less than 550, boosting your credit score by 10,50 or 100 points could save you thousands enabling you to qualify for a competitive interest rate on home/ Personal loan or Credit from main stream lenders when compared with non-confirming lenders, especially if you’re planning to apply for a Home-loan or make a major purchase such as buying a new car . It can take several weeks, and sometimes several months, to see a noticeable impact on your score, the sooner you begin working to improve your credit, the sooner you can see results. If you are in the market planning to buy a property or borrow from the bank don’t hesitate to contact me especially if you have a CCR less than 550. I could be in a position to recommend you to someone within my network who can help fix your negative credit score.

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