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How to Improve Your Credit Score for Loan Applications

Credit scores are vital if you’re looking to take out a home loan or personal loan. A lower credit score can prevent you from getting the amount you require or the best interest rate on your loan.

That’s why it’s so important to know how you can improve your credit score. But before we address that, we need to understand what a credit score is and how the credit report system works.

What Is a Credit Score?

A credit score is a number based on the information in your credit report. Scores usually range from zero up to 850 - 1200, and give a quick indication to lenders of how much you can borrow. Credit scores can also affect the interest rate at which your loan is approved and even the loan contract terms, so your credit score must be as high as you can make it before applying for any loans. You can find further information on credit scores at Compare and Connect.

What is the Minimum Credit Score for a Home Loan or Personal Loan in Australia?

You should aim to achieve a minimum score in the good range for a home loan or personal loan. The ranges vary slightly depending on which credit score agency you check through. Equifax lists a good score between 666-755, Experian lists good at 625-699, while Illion lists good at 500-699. All three have two score ranges above the good range, so you can get a better loan if you can reach higher than good.

Credit scores can be changed by successful loan repayments, responsible credit card usage, and other tactics. You can compare finance products via Compare and Connect so that you get the most from your loan.

How Do I Check My Credit Score?

There are three major credit reporting agencies in Australia: Equifax, Experian, and Illion (formerly Dunn & Bradstreet). These agencies have different parameters for credit scores, so it’s essential to research the agency you choose to understand the credit score you are issued. For example, Equifax scores fall between 0-1200, whereas the other two use 0-1000. 

Another common pitfall is that credit reporting agencies have access to different information about you, so getting a report with each of the three is the best way to be certain. Credit reports can be free, but some agencies will charge a small fee for providing the report.

What Affects Credit Scores?

Any accounts that are in your name can affect your credit score. This includes utilities, mobile and internet plans, car loans, insurance, rent, and mortgages. It’s best to assume that anything with your name on it has been reported to a credit agency. Your ability to pay these bills and maintain savings will affect the credit score you are issued. If you have been behind in payments on any bills, this can bring your score down. A lack of such accounts will also give you a lower score, as there is little evidence to show you are a responsible borrower.

Does Afterpay Affect Credit Score?

Afterpay is an exception to the information above. As Afterpay doesn’t use credit checks in its approval process, Afterpay is accessible to people with any credit score. Also, as Afterpay doesn’t report to credit agencies, default payments on Afterpay will not be visible on a credit check.

Do Debit Cards Help Your Credit Score?

The short answer is no. The activity on your debit card is not generally shared with credit reporting agencies. This means that while your debit account will not help you increase your credit score, it also won’t hurt it if you overdraw or have issues with your account.

Does a Credit Limit Increase Affect Your Credit Score?

Yes, but it can be good or bad. Credit scores take into account your debt to credit ratio. If you have cards with a total credit limit of $16,000 and your balances total $4,000, then your ratio is 40%. If you fill up the cards with more purchases, your ratio will change and, therefore, your score. A higher credit amount with less outstanding balance can help with this. 

However, if you apply for a higher limit and are declined, this will be reported to credit agencies and negatively affect your score. For more information about how a credit limit change can affect your credit score, visit Compare and Connect.

How Do I Improve My Credit Score?

  • Credit scores are based on your proven ability to attain and repay loans. You can start small, by making sure you keep up with all of your payments on existing bills. 
  • Changing pre-paid accounts to contracts can help build up your credit rating too. 
  • Consider taking out a personal loan at a level that you can pay off easily, as this will demonstrate your financial reliability. 
  • Replacing your debit card usage with a credit card that you pay back every month is another easy way to increase your credit score without having to spend more than you already do.

How Long Does It Take To Improve Credit Score?

It depends on the type of financial issues you have had in the past. A serious credit infringement will be reported for seven years from the incident, while credit inquiries, overdue accounts, writs, summons, and court judgements from the past five years will also be present on your report. 

All repayment history from the past two years will be available to the reporting agency. So, if you have had a good repayment history in the past two years, but had difficulty before then, your credit report should be clear. To be certain of the information listed on your credit report, it is best to apply for a report so that you are fully aware of your status.

Final thoughts

Your credit score is your key to the world of finance. That’s why it’s so important to know and understand your financial position so you can get the advantage when applying for loans. A trusted credit score agency with good advice is essential to get you kicking your financial goals. So give your financial status a boost with Compare and Connect today.

Sally Writes 04 Nov 2021