Credit scores, credit history, credit bureaus… I will explain why there is so much more to credit than shopping sprees and home loans.
Before I started living and breathing credit for work, I was like many Australians. I thought I had a pretty decent understanding of my personal finances, but I had never checked my credit score and to be honest, I didn’t really know how it was used by financial institutions.
But when you think that most people will use, and possibly depend, on credit in their lifetime, it’s surprising that so many of us are still in the dark when it comes to knowing, and better still, understanding credit and what our credit reports say.
Using credit is essentially borrowing money that you promise to pay back within a certain timeframe. This borrowed money can be in the form of credit cards, personal loans, home loans, mobile phone contracts and so on.
I think credit history and credit scores work in a bit of a circle. Banks, lenders, telcos, utility companies and other businesses that you borrow from, apply for credit with, or owe money to, report on your credit activity to companies called credit bureaux. These bureaux keep a record of your credit activity for a period of time and this becomes your credit history, or credit file.
A credit report basically summarises all this information, and your credit score is a number or rating calculated using all the information in your credit file and mathematical algorithms (don’t worry; I won’t bore you with those details!).
This score and the information in your file is then used by credit providers as an indication of how likely you are to repay your loans, or how good your credit reputation or worthiness is. So companies both feed into your credit file, and use it to decide if they will lend you money.
Here are some other reasons why it’s important to care about credit:
Knowledge is power
Knowing and managing your credit score can be very powerful. For example, if you’ve applied for a lot of credit cards in a short period of time, this can negatively impact your credit score so by knowing this you can make better financial decisions and choose a credit card that will meet your needs for a longer period of time.
Your credit score will impact your ability to borrow money
Banks and lenders use your credit score to help them decide whether they will lend you money, and typically the higher your score, the better your chances are to be approved for credit. While it’s not all that lenders look at when deciding whether to approve your application, it does play an important part so it’s smart to know where you stand before applying for credit.
TIP! Most applications for credit will be included in your credit history including if you are declined! You may be better off knowing if you have a low score and working to improve it before applying for credit than to avoid further tarnishing your reputation by getting declines.
A better credit score can mean a better deal
A better deal or lower interest rate means you save money. Knowing and understanding your credit score and history can put you in a better position to not only be approved to borrow money but to get the lowest possible interest rate. Lenders overseas often give customers with lower credit risk a better interest rate, and that trend is even starting to happen here in Australia too.
Accessing your credit score could help you get into a better financial position. There are a few different ways you can access your credit score, including through the Credit Savvy website which is a free consumer initiative backed by Aussie. Credit Savvy gives you free, ongoing access to your credit score, resources to understand and manage your credit reputation and updates if there are any changes to your Experian credit file.
You might be surprised by what you find, and remember, knowledge is definitely power when it comes to managing your personal finances.