We’ve talked about credit, and how it can help you achieve your goals. Think mortgages, HECS debts or car loans.
But in order to access these forms of debt, banks or lenders want to be sure that you can actually pay them back. In other words, they want to make sure your ‘pinky promise’ to repay is actually reliable.
In order to know that you’re a responsible borrower, banks will look at a few different pieces of information, including your credit score.
Your credit score will help the bank or lender determine the risk of lending you cash.
And what actually is a credit score?
Think of your credit score a little bit like a ‘review’ on your credit situation. Just like you can rate your Uber driver, your Airbnb stay or your favourite restaurant - banks and lenders will ‘rate’ you.
The bank will rate you based on:
Whether you are paying back your loan consistently
Whether you are making the correct amount of repayments
And this helps other banks and lenders determine how risky you are as a borrower for the future. AKA, whether you’ll pay them back or not.
So how do credit scores actually work?
In Australia, your credit score is calculated by credit reporting agencies, like Equifax or Experian. Different agencies will score your credit in different ways, but it’s usually a number between 0 and 1200.
And the general rule is: the higher the credit score, the better you look to a bank, and the more likely the bank is to loan you money. The lower the credit score, the tougher it is to access credit.
Your credit score comes from your credit report, which holds information like:
The amount of money you’ve borrowed from lenders (including credit cards and Zip accounts)
How many credit applications you’ve made (yep, all those applications you’ve made for ‘fun’ actually get stored on your report)
Whether you’ve made your repayments on time.
Why is my credit score important?
This is like your financial report card.
Banks will also look at your score when determining how much money they’ll lend you - and at what interest rate. The better your score, the more likely a lender will cut you a better deal.
This is particularly important when it comes to getting a home loan. A good credit score is one of the important criteria to help you access the money you need, at a competitive interest rate, so you can achieve the Aussie dream of home ownership!
So what credit score do I need to buy a house?
Banks will look at a number of factors when approving a finance application (like your income, your expenses and your credit score). With an Excellent - Good credit score (1200 - 622), it’s likely you’ll get the big tick from a lender.
But if you’re sitting in the Average and Below average territory (621 - 0), things might get a little tricky. But don’t worry! Your credit score is one of many things banks and lenders look at when approving a finance application.
It could mean lenders will ask you for more information about your finances. Or, it could mean you’ll need to opt for a specialist lender outside of the Big 4, because of the risks involved.
How do I check my credit score?
If you haven’t checked your credit score, it’s super easy to check. You can check it via multiple sites, including the Flux app, and you can sign up in under 30 seconds.
Apps like the Flux app will also tell you what factors are impacting your credit score - good and bad - and give you some helpful tips to make sure your finances are lookin’ good.
Grab a calendar (a physical one!)
Mark the dates when your credit card repayments are due
Mark the dates when your bill (phone, electricity, water...you name it!) repayments are due
Hang your calendar somewhere you’ll see it (like next to the fridge, cos let’s be honest...we’re gonna snack)
Now jot those dates into your phone, and set reminders for the week before each payment is due. You can set multiple reminders if you want to be extra careful!
Great! Now, you’re starting to form better repayment habits.