How to bugger up your credit rating! (or not)
It doesn’t matter if you you’ve been an active borrower or never borrowed money, if you are in business or work for wages, the fact is that you do have a credit rating.
Your credit rating or credit score is a number. It depends on the agency but it’s either between 0-1,000 or 0-1,200
Why is your credit score important?
Virtually every lender will look at your credit score before deciding if you qualify for a loan.
If you score is low (say below 400) then most main stream lenders will automatically decline the loan. Also, you don’t even have to have bad credit to get a low score (more about that soon).
On the other hand if you have a high credit score (say 800 or better) then as a business customer you are going to be highly sought after by lenders.
It’s not just a question of yes or no. The more lenders who will back you the more competition for your business and the better rate and terms you can negotiate.
Who are these faceless creatures that give you a score without even knowing you?
In Australia there are several companies who do it. Mostly they are large multinational companies who specialise it this kind of thing in many countries. They gather data from publicly available sources such as the Australian Securities and Investments Commission (ASIC), from lenders who report on applications made and any defaults and various other sources. Lets face it, there is lots of data out there about you and your business and these guys have been gathering it for years!
Dunn & Bradstreet: http://dnb.com.au/
You might not have heard of them but they sure as hell know who you are.
So how do they do it?
A combination of information, data and amazingly complex statistical modelling driven by powerful computers.
The information they hold is things like:
- Your name/age/address and other personal details;
- Any previous credit that you have had including credit card limits, personal loans, home loans, short term credit and so on;
- The sort of companies you have borrowed from such as credit card, pay day lenders, banks, car loan companies etc.;
- Any credit problems such as un paid bills (Telstra is a classic), loan defaults, bankruptcy or insolvency issues;
- Any companies that you are a director of current or past;
- Rental defaults if you are a renter;
- Store credit and interest free cards (yes they do count!).
Things that can bugger up your score
One thing to note is that your score is not a fixed number, it changes over time. It might even change month to month if you are active in the credit market.
Some of the obvious things that mess up your score are:
- Loan defaults and late payments;
- Not paying you phone or internet bill. This can often occur when people move around from rental to rental property and forget update their address with their telco;
- Not paying your rent on time or being on a tenancy agreement where others have failed to pay on time.
There are also some less obvious ones such as:
- Multiple applications for credit over a short period of time;
- Applying with payday lenders for regular small credit amounts;
- Having lots of credit cards and not paying you card in full every month.
Fixing a messed up score
Again there are some obvious things you can do to get your score up.
- Pay on time;
- Don’t take card limits greater than you really need;
- Don’t make multiple loan applications when you are trying to finance something (speak to a good broker!);
- Ensure that your telco and other regular bills are paid when due.
If you do have a problem such as getting declined for a loan you need to know why. The rating agencies will give you a free copy of your credit report. You can simply ask for it once a year or if you have a problem.
If there is a mistake then it can be fixed.
- First contact the credit provider and confirm that they have made a mistake.
- If you have inadvertently missed a payment or do owe them money then pay it and ask the credit provider to list the default as paid with the credit agency.
- If it is a genuine mistake by the credit provider then demand that they remove the default.
- If they don’t then you can make a complaint to the AFCA (Australian Complaints Authority) who will replace the former Credit Ombudsman’s services from 1 Nov 2018. They can be found at https://www.afca.org.au/home/