When you apply for a line of credit, be it a home loan, a personal loan, a credit card or a new mobile phone plan, lenders will check out your credit report when they assess your application. So, what do they learn and why does it matter?
Your credit score
First and foremost, lenders will see your overall credit score. This one number is essentially a summary of your financial history. It is comprised of a wide range of information, including your repayment history and any past credit issues.
Your credit score gives lenders a broad, reliable indication of how good a credit risk you are likely to be compared to others in your age range, location and demographic. Therefore, it has a big impact on whether lenders will decide to extend credit offers to you and under what conditions.
Demographics and geography
Stable employment and a long-term place of residence are positive factors when it comes to your credit score and vice versa. Where you live may also have an impact, as some residential areas may have a higher credit risk profile than others.
Since the introduction of Comprehensive Credit Reporting, more “positive” credit behaviour, such as paying your bills on time, is now reflected in your credit report.
If you have a good history of repaying your bills on time it tells lenders that you are a responsible borrower. However, a history of late payments of 60+ days, late payments of 30 days over several months or multiple loans and credit accounts with overdue payments can drag down your score.
Lenders can see the credit accounts that you currently hold – such as home loans, credit cards and personal loans – and how long you have had them. Having held credit accounts, and managed them responsibly, for a long period of time can indicate that you are a responsible borrower.
Your credit limits
Lenders see the total amount of credit you have available. If you have a lot of available credit already and are applying for a loan, a lender may be concerned about your ability to meet your future obligations. This is why it’s a good idea to regularly assess the total amount of credit you have on your file and cancel credit lines that you no longer need.
Your credit enquiries
Lenders will see if you have been making multiple credit enquiries recently and this can have a negative impact on your score. The type of credit you are applying for matters too – applying for short-term loans with alternative lenders may bring your score down, whereas applying for better types of credit or lenders can be a positive.
Negative credit events
Your credit report shows lenders any past problems you may have had with your credit, such as defaults, bankruptcies or court judgements. These factors will drive down your score.
Find out how you measure up
It’s easy to get your credit score. GetCreditScore uses Equifax, the market leader when it comes to credit scores. Equifax is used by the most lenders and is therefore the score you should be paying the most attention to.
Get control over your financial future
Understanding your credit score can help you manage your credit profile so you can take steps to improve it if needed. A good credit score can give you confidence when applying for credit; it may also help negotiate a better rate with some lenders.
Stay on top of your finances and your credit score. Get your FREE credit score today.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.