Have you seen your credit score, and were you confused by what the numbers mean? While it may feel a bit weird, to begin with, you can think of credit scores as a set of numbers up to 1000, where the 'passing mark' is around 600.
'Good credit' is just a number that explains to lenders how good you are with your money. The higher you build your score, the better guarantee of getting approved for loans, credit cards and insurance with low interest.
But where can you find good credit? The good news is that you create it yourself. Good credit is something we can all strive for, so in this blog, we'll cover a couple of easy tips around improving your credit score.
Who checks my credit scores?
Most people you borrow money from or deal with financially will want to know about your credit score. This includes banks, credit unions and lenders, credit card providers, landlords and employers. Even entire industries target specific credit score brackets with loans suitable to them.
The reason for this is that just about everyone borrows credit at some point in their lives, either for investment, mortgages, insurance, credit cards, or something else. Your credit score gives those people you are borrowing from an idea about your 'perceived level of risk' — in short, a snapshot of you as a borrower.
So, if you have a low score, you may get offered a very different set of borrowing options than if you had a better score. Deals like payday loans and other short-term, high-interest rate loan options — are all high risk and relatively expensive because you're seen as less secure.
How do I secure good credit?
You need to grow out your credit history first to secure good credit deals in future. You're also more likely to speak with private companies and credit unions if your score is low than with banks, which have a more rigid set of lending standards. Getting access to credit also depends on what you're borrowing for — while banks see the value in homeowners, they're often not as open to investments on smaller, personal items that have less return on investment for them.
So how do I get a good credit score?
Good scores are built by following good credit behaviours.
But who decides what's good or bad?
All actions you take towards credit are weighed up and given a value based on the activities of millions of other credit borrowers. Some things will be obvious — defaulting on repayments is never a good sign and will drop your credit score. But others actions are more subtle.
How to achieve good credit.
Focusing on the following things will help grow your score;
Keep credit enquiries low.
If you need a loan, shop around first before applying for credit. Applying for credit each time will drop your score by a little, even if you don't get approved because you haven't shown a history of positive repayments yet.
Have a credit history.
Keeping a history of repayments open is one of the best things you can do to grow your score. It gives lenders and credit providers evidence of your ability to repay what you owe.
Keep a low credit utilisation on your credit card.
Your credit utilisation is how much of the credit you're offered you use. Creditors like to see you use as little of this as possible — around 30% is ideal, as it shows that you have restraint and aren't consistently overspending on your credit card.
Pay on time.
This one's easy to understand. Creditors like you to stick to your agreements.
Don't take out too many cards or loans.
There's no magic number here, as it's partly down to what you can personally afford. But each time you take out a new credit application, you undergo a credit enquiry. That's because creditors who provide low-interest, low-risk rates want to attract people who are good with their money and don't spend recklessly. So each application is seen as a negative until you can grow it with positive payment behaviour.
Consider the type of loan you want.
Generally, high-interest, short-term loans such as Payday, Afterpay or BNPL (buy now, pay later) will be harder to keep up with than a traditional longer-term loan arrangement. If you're struggling to find the money to pay for another loan, it'll quickly have a knock-on effect on your score.
We can't tell you what to do — there may be times you need a quick loan for emergencies. Some people will be better at keeping aside a rainy day fund than others, but it depends on personal circumstances. However, if you can, we suggest you try to save some money each week or fortnight if it's within your ability.
Keep a good credit mix.
This is the mix of loans and revolving credit (an agreement that allows a borrower to keep borrowing) you take out. A good blend is worked out around what the average person might need if no unforeseen emergencies happen; a mortgage, auto loan and two credit cards. If you take out lots of credit types, you risk bringing your score down because it looks like you're juggling too many loans.
You also shouldn't feel the need to take out credit 'just because' — otherwise, you're borrowing money and repaying interest without reason.
Good credit depends on what you want to do, whether taking out a small loan for a personal item or a fixed rate on a new home. Whatever you decide to do, having a better score will change which lenders you deal with and how at-risk you seem when it comes to striking an agreement for borrowed credit.