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What is your credit score? And why should you know what it is.

Whenever you apply for a loan, a bank completes a credit check to determine what your credit score is. Depending upon what your credit score is, this can determine whether you will actually be successful in getting a loan.

Everyone has a credit score which ranges between 0 - 1200. The higher your credit score the more favourably a bank will consider an application for finance. A good credit score starts from 680 upwards. This is the absolute minimum that many banks will consider you for a loan. Below that you will likely be declined.

Therefore it is imperative that not only do you consider your credit score when going for a loan but you also understand how your past and current behaviour can directly determine how high - or low = your credit score is.

So what impacts upon your credit score?

Firstly, every time you enquire about or apply for any type of finance, your credit report takes a hit. The old 'let's shop around to get the best deal' does not serve you when it comes to your credit score. Multiple applications be it for credit cards, store cards or applications for preapproval with multiple banks will all reduce your credit score. Applying for a couple of credit cards in quick succession or even at the same time to take advantage of a Qantas point promotion can, for example, reduce your credit score based upon a credit check being completed every time you enquire or apply. The more applications that show up in your history, the lower your credit score will be. So buyer beware.

Secondly, your 'credit behaviour' determines your credit score. This directly relates to whether or not you pay your bills on time, whether you have missed a payment or whether you have fallen into arrears on any account. This applies for all credit cards, personal or car loans, phone or utility bills or even a store card (David Jones for example). A bank will see your repayment history for these accounts on your credit report. The credit score that you are given on your report will be directly determined by your repayment history. So more than ever it is important to avoid falling into arrears on any bill. Paying your bill a couple of days late will not show on your credit report. Missing paying your bill for a month will.

The point that shocks many customers when they go to apply for a loan is when they find out that any default or arrears can remain on your credit file for 7 years. Yes, 7 years. Even catching up on a missed account and finalising the payment with the provider will not remove the arrears or default from your record. It will still show on your credit report for 7 years. Therefore, a seemingly simple or innocent mistake or sometimes an error of judgement, can affect your credit score for a very long time. While your credit conduct may be good elsewhere (which is positive for your credit score over time), the existence of the arrears or the default will always still negatively impact your score, compared to not having it recorded on your credit report at all. So be careful, as the bank will see any arrears or default when you apply and will use the affected credit score to determine whether they will lend to you or not.

There are agencies that can assist in having a negative record on your credit report removed, for a fee. The point to note is that the majority of mainstream banks will not consider you for a home loan when a default or arrears exists, especially when it contributes to your credit score being below 700. This could force your hand in considering a non-mainstream lender which usually come with both higher rates and fees.

For all my clients prior to applying for a home loan I will complete a credit check (which will not hit their credit report), to see what their score is and to identify any issues that we need to address before we apply to the bank. It is important to know what is on your credit record and address anything before the fact. It could be something as simple as an old credit card that you forgot about or never activated that is impacting your credit score. This can easily be addressed and cancelled before we put up an application to the bank.

It is better to understand what is on your credit report - and to be aware what your credit score is prior to applying for a loan - so that you always put your best foot forward.

Note to self. Know your credit score and understand how what you do on a day to day basis impacts it.


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