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Why is your credit score important and what’s changed?

finance-advice
1 minute read

Why is your credit score important and what’s changed?

by Sam O Connor 02 December 2020 1 minute read

Since the introduction of comprehensive credit reporting, it matters when you pay your bills. Now your credit score is based on both positive and negative information about your credit history.

Why is your credit score important and what’s changed?
December 02, 2020

According to Yellow Brick Road, your credit score can move up or down according to your payment behaviour. Miss a repayment on your credit card and your score will go down. Pay on time and your score will improve.

Why is your credit score important?

Whenever you borrow money from a financial institution, you’ll be glad of a good credit score. One of the first things lenders do when you apply for credit is to check your score from a credit bureau. They want to know what kind of a risk you represent as a borrower. A good score shows your capacity to meet your repayments, whether they be for a credit card, personal loan, phone plan, auto loan or mortgage. A not-so-great score indicates you might be a higher risk.
 
Your lender will use your credit score and credit report information, in conjunction with their lending criteria, to decide whether to approve your credit application and on what terms. 
 
If you pay your bills on time, this helps create a good impression with lenders and may give you more bargaining power. If you’re a young first home buyer with a short credit history, lenders can now see your positive repayment behavior. Based on this information, they can decide whether to extend credit.
What does your credit report include?
 
Under the comprehensive credit reporting (CCR), your repayment history has taken on new importance. In the past, your credit report only contained information about overdue payments, defaults on payments, court judgements, bankruptcies and other serious credit infringements. Now it includes all your repayment history for the last two years for credit accounts like your home loan, personal loan and credit cards. You can expect to see:
  • How often you make repayments and if you make them by the due date
  • Any credit you have applied for and if you’ve been approved or rejected
  • The type of credit accounts you open and the name of the credit providers 
  • Dates you open and close accounts
  • The maximum limit on your credit accounts
  • Any conditions associated with your repayments
  • Overdue credit account and default details
Not included is data about your utility or phone bills. You will only see these mentioned in your credit report if you’ve missed a payment by at least 60 days.
Does one late payment matter?

The effect of one overdue payment will depend on factors like how late it is and how frequently you’ve paid late. As each credit reporting bureau and lender uses its own algorithms, there is no way of saying with certainty the effects of one or two late payments. However, generally, the longer a bill goes unpaid, the more damaging it is to your credit rating.

According to Equifax, if you pay your credit card or loan repayments more than 14 days past the due date, this can be recorded on your credit report as a late payment. This entry stays on your report for up to two years.

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If your payment is late by 60 days or more and the amount you owe is over $150, this is listed on your report as a default. Any credit provider, including telco and utility companies, can report defaults and these remain on your file for five years.

Your lender may read too many late payments as a sign of financial stress or poor money management, so might be reluctant to approve your credit application. Also steer clear of making too many applications for credit in a short space of time, as this can give the impression that you’re struggling financially.

Take heart that late payment or any other negative information won’t be there forever. Your efforts to pay off your debts will be recorded on your file, showing lenders that you’re trying to mend your ways.

Always check your credit report before applying for a home loan or any other loan. Get a free copy once a year from credit reporting bureaus like Experian, Equifax and your mortgage broker.

Why is your credit score important and what’s changed?
Why is your credit score important and what’s changed?
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Sam O Connor

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