How to Understand Credit Scores
Your credit score is a three-digit number between 0 and 1200 that relates to how likely you are to repay debt. Banks and lenders use it to decide whether they'll approve you for a credit card or loan.
What's a good credit score?
It is viewed that the higher your credit score is, the likelihood of you having credit issues in the future is lower and therefore you present as a lower risk for a lender. Therefore, the lower your credit score, it is viewed that you could be a higher risk as a potential borrower.
In addition to your Credit Score, most lenders will apply their own lending criteria, so having an experienced Loan Consultant in your corner for this is imperative.
Why is it imperative? The more enquiries you make on your file (the more applications you make) the lower your score can become. You want to ensure that you are applying to the best lender the first time, which takes having some knowledge about which lenders are offering the best deal for your individual situation at any one time.
Here is a guide to Credit Score ranges:
Below average to average (0-509) Lenders view people in this range as more likely to have an adverse event being recorded on their file in the next 12 months. You are in the bottom 20% of credit-active population.
Average (510-621) If your credit score falls in this range some lenders will still consider that it's likely that you will incur an adverse event in the next 12 months. Your score places you in the bottom 21-40% of the credit-active population.
Good (622-725) For people that fall within this range, lenders tend to feel that it is less likely to have an adverse event in the next 12 months. You fall in the mid-range (41-60%) of the credit-active population.
Very good (726-832) Most Lenders believe that potential customers that have a credit score in this range are unlikely to have a negative event recorded on their credit file within the next 12 months. Your score places you in the second-highest percentile range of the credit-active population (61-80%).
Excellent (833-1200) At the top of the list is where a lender would feel that it's highly unlikely to have a negative event recorded on your file within the next 12 months, when compared to the average Australian. The odds of no adverse events occurring on your credit file in the next 12 months are five times better than the population average and you are in the top percentile range (81-100%).
How is your Credit Score calculated?
Type of credit provider. There may be different levels of risk when approaching different lenders. A non-traditional lender may have a different level of risk than a bank or credit union.
The size of credit requested. Both the type and size of the loan or credit limit you're requesting can affect your Credit Score. Mortgages have a different level of risk compared to credit cards for example, as the lend is viewed as secured lending against unsecured.
The number of credit enquiries. Every time you apply for a credit product, the credit provider obtains a copy of your file and the application is noted. If you've shopped around for credit and applied at a number of places at the one time, it potentially flags you as a higher risk. The pattern of credit enquiries over time also affects the level of risk.
Directorship information. If you're a director or proprietor, it may impact your Credit Score so it's important to check both the individual and commercial sections of your credit file.
Age of credit file. The date your credit file was created. A new file may indicate a different level of risk compared to an older file. For example, if you are 45 years old and applying for credit for the first time, the lender may feel that you are applying under a new name as it isn't the norm these days that someone goes through life without touching their credit file a few times.
Personal details. Your Credit Score will consider your age, length of employment and how long you've lived at your current address.
Default information. Any personal or business credit such as overdue debts, serious credit infringements or clear-outs could negatively affect your Credit Score.
Court writs. Default judgements or court writs may convey you as an increased risk and negatively impact your Credit Score.
Do You Have Someone Experienced in Your Corner?
Fox Finance Group is one of Australia's leading personalised financial service organisations. We have spent many years getting things right so that you can rest assured that you are getting the very best financial advice available on the market today.
If you would like to know more about what your Credit Score is today, click below to get started!