Protecting Your Credit Score in Hard Times
Written on the 31 March 2020 by Nathan Drew, Fox Finance Group
Understanding your credit score and what you can do to protect it is paramount in today's environment. This is especially important if you are looking to get finance for yourself or for your business at some point in the future. (Which right now relates to most Australians)
Starting from the beginning, understanding what a credit score is and how it influences your ability to gain finance can help you make your own financial decisions to benefit your score.
To read more on understanding your credit score click here.
In a nutshell, your credit score is a record of your financial history recorded over a 2-year period. It provides banks and lenders an insight into how credit worthy you are and how you have been handling your finance in the past.
Equifax (formerly Veda) is the country's largest credit reporting bureau that calculates your Equifax Score using various algorithms and information provided to them by lenders and other businesses, such as telecommunication and energy suppliers. What is produced is a number between 0 and 1200, the higher the number the less of a risk you are.
Read more about what the Australian average credit score is here.
You would have to be hiding under a rock to have missed the headlines around the unfolding Coronavirus outbreak is wreaking havoc on the business world. Many of our clients have been forced to take stock of their business or personal credit score, especially given the current climate. The rally around their credit scores is largely around ensuring that they are in the best position to apply for extra funding to maintain their cash flow or invest in new equipment or vehicles.
Read more about what Government Incentives and Support is available to both business and individuals.
Here are a couple of questions that our team are getting a lot of right now.
What can I do to protect my credit score through these difficult times?
A good place to start is with a clear plan on how you are managing your personal cashflow. Managing your cashflow is as simple of knowing where your money is coming from and going to. It is critical to ensure that the lenders can see an electronic pathway of your funds. In short, not pulling all of your money out of your bank and paying cash for things is a good place to start. Today's electronic banking gives you the ability to prove to the lenders that you are looking after your money.
Also, not overdrawing your account on an ongoing basis is key. Most banks will let you overdraw your account by a small amount if you are taking cash from an ATM. This might be convenient at the time that you need the cash, but unfortunately what this could be seen by the lender is that you are living outside your means, and this could have a negative effect on their decisioning as to whether they should or shouldn't lend you money.
Another way to protect your credit score is to have a budget in place to help you manage your money. There are loads of online budgeting tools available online nowadays that help you keep track of your personal cashflow. If you run a business, keeping tabs on your cash flow via your accounting software will give you an overall picture of when your money is coming in and when bills need to be paid, as well as setting business budgets.
Is my business credit score and my personal credit score the same?
In some ways, business credit scores are like consumer credit scores. They fall within a range, and the higher the score, the lower the perceived risk. Businesses with higher scores have a better chance at securing financing, and a higher business credit score typically means being charged a lower interest rate on financing. Both business and personal credit scores are determined using the same scoring model from credit agencies such as Equifax.
Read what the Credit Score business Equifax has to say on the subject by clicking here.
Has your cashflow been affected by the Coronavirus?
Consider contacting your credit card issuer or lender if you are affected by the coronavirus. In the current climate, lenders are putting action plans in place to help people and their businesses in need, for example, some credit companies are increasing lines of credit, while others are allowing you to defer your repayments for a period if you can show that COVID-19 has directly affected you and your ability to make money.
Now is a stressful time for a lot of Australians. Even though the conversations with creditors can be difficult, it is necessary right now to ensure that you protect your credit score for the future. Having some honest, upfront conversations with people about how you can't afford to pay your commitments right now is something that a lot of people are having to do. In general, people are very understanding of the situation that we all face right now, and a lot of the time you will find that businesses will be willing to work with you on this. It all starts with a phone call to negotiate the best outcome for everyone. If you find your business is struggling to cover debts and general bills, then speaking to the companies and individuals and negotiate payment terms, even a deferral of payments could help you pause things while you go through this difficult time.
Read more about the FAQs that have been put together by the Australian Banking Association to help you understand the current climate.
Author:Nathan Drew, Fox Finance Group
About: Managing Director - Fox Finance GroupConnect via:LinkedIn