Just how important is your credit score? Well, this is how banks and businesses evaluate your creditworthiness before they actually extend credit for either a mortgage, a personal loan or a credit card.

Credit score is a hot button topic in the country, mainly because of an upcoming legislation that will amend the information that is available to banks and lenders when they check for a potential borrower’s creditworthiness.

“A credit score is a mathematical score [from 0 to 1000] based on personal and financial attributes around creditworthiness for a loan applicant,” said Chris Irwin, the head of Retail Credit Risk at Bank of Queensland (BOQ).

“Generally, the higher the credit score, the better. It helps a lender decide whether to approve your request for finance – such as for car loans and credit cards: the dollar amount and the interest rate offered,” Irwin added.

At the moment, credit reporting bodies (CRBs) gather your personal data, and information on enquiries you make for finance, and any defaults or serious non-payment of debt. This is included in your credit report.

From 1 July 2018, the consumer finance industry would be able to utilise a more inclusive reporting system, whereby credit providers would be able to gauge your debts held and repayment conduct, to get a more exhaustive and balanced picture of your credit position.

Under the new legislation, credit reports would be comprised of current loans and credit cards held; when accounts were opened and closed; and your repayment conduct (up to a maximum of 24 months). Credit reports would also still include the date of any loan defaults, bankruptcy or court judgments. All these would be used to calculate your credit score

“The conduct of a borrower on their existing loans will be included in the credit scoring, and should create a positive impact for many applicants,” explained Irwin. “The credit limit or amount of the debt and your repayment conduct will be factored in, so if you have been paying your debts on time, it will be beneficial for you.”

To make sure that your credit score is precise and ideal, here are some useful tips to help you improve on it:

1. Pay your debts on time

Repayment of your debts is the finest way to augment your credit score. Setting up direct debit payments and/or having a financial budget or plan are great ways to make sure that you are able to pay your debts when they are due. A fixed interest rate may also help keep your debt repayments known and planned.

2. Carefully manage your debt-to-income ratio

The ratio signifies the total amount of debt compared with your total household income. Contingent on the kind of debt held, a high amount of debt can put immense pressure on your future ability to make repayments. Be mindful of whether your existing or future income would be able to meet your debt level.

3. Don’t shop around for debt

If you apply to a lot of credit providers, it may look as if you are eager to take on debt. It is acceptable to apply to two lenders for a home loan or car loan, and look for the best rate and offer. However, if you apply for a number of personal loans or credit cards, this behaviour may bring down your credit score.

4. Be mindful of your credit cards

Credit card debt is a rising commitment for a lot of Australians. It is important to manage this debt and make your monthly repayment in a timely fashion. It is also significant to not to surpass your card limit.

5. Know what your score is

Being mindful of your credit score is the best means of improving it. You can take a look at your credit score on Credit Savvy, Credit Simple and GetCreditScore, and you can also request a copy of your credit report for free from the CRBs.

For more information on credit scoring and consumer lending, CreditSmart is another useful source of information.

Is your credit rating not up to par? Don’t fret. There’s still hope. Get back on the right track and start improving your credit rating!

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