How to improve my credit rating

Credit ratings: trust us, this is important. They aren’t a lot of fun to talk about, but they can take you places.

You may have a ton of questions about your credit rating and how you can have an impact on it, so let’s get started.

What is a credit rating?

Credit ratings are used by lenders to understand more about an applicant’s credit history. For example, we use this credit rating information, along with other criteria, as part of the decision-making process when you apply for a personal loan.

Why does a good credit rating matter?

It’s important to know that a good rating can get you savings and benefits over time. The first thing to understand is why you should keep your rating high.

Think of it as building trust: ‘Do I want to lend you something that’s valuable to me even though you have a bad history of giving the item back in its original condition?’, or ‘Do I want to lend you my t-shirt even though you haven’t returned my last two?’.

To your lender, a high credit rating would mean that you can be trusted because you have a trustworthy history. So, if you’re out there as a first home buyer looking to get a home loan or you want a vehicle loan for that new Mazda CX-5, your best chance is to have a strong credit rating. It’s a reliable way of showing lenders you’ll have no problem paying back your debts and that they won’t have to chase you up on repayments. Check out our tips on repaying personal loans.

That is not to say that you cannot apply for a personal loan with a bad or poor credit rating. Some lenders, like us,  understand there are many reasons that can contribute to a poor credit score and that every situation is unique. 

Like we said, it’s a way to measure how much a lender can trust you.

How are credit ratings calculated?

Credit ratings are generally a score between 0 and 1,200 and are grouped into five categories from ‘below average’ to ‘excellent’. This score is calculated by a credit rating agency, like Experian, Equifax, and Illion, based on a number of factors:

• Your personal details (including your age)
• The types of credit you’ve applied for, including mobile phone accounts, electricity and other utilities accounts, personal loans, credit cards and mortgages
• The amount of credit you’ve borrowed
• The number of enquiries on your credit file
• Late payments or defaults on credit
• Any debt agreements or personal insolvency agreements you’ve entered into

Each agency can score in different ways, but the rule of thumb is this: the higher the number, the more likely you are to have your request for credit approved and accepted.

How do I get a copy of my credit report?

You can see your credit rating by getting a copy of your credit report through the following rating agencies:

• Equifax
• Illion
• Experian

Free credit reports can sometimes be available in special circumstances, or once every twelve months.

How do I improve my credit rating?

It’s always best practice to make sure your rating is high so you won’t be biting your nails when a lender performs a credit check on you. If you want to beat them to it, you can do a credit check yourself to see where you stand before diving in.

Contact any of the three Australian credit rating agencies for a report or grab your credit score for free from an online credit score provider.

Once you know your credit score, there are ways you can work towards keeping it where it is or making it better.

1. Aim to always pay your bills, rent, and loan repayments on time.
   Even paying your gas or electricity bill late can affect your credit rating. Plan your weekly, fortnightly, or monthly payments so you can start to improve your rating.
   
   
2. Manage debt wherever possible, including credit cards.
   Keyword: ‘manage’. You’d be happy to hear that lenders aren’t looking for debtless - they’re looking at whether you can manage debts. Our best advice is to manage your credit cards well so you don’t lose control over them. Find the grey area where your credit cards can help improve your credit rating.
   
   
3. Lower your credit card limits.
   Consider reducing your credit card limits or the number of credit cards you have. Look, we know credit cards are irresistible at times, but they can end up working against you if you’re not on the ball with repayments.
   
   
4. Limit the number of enquiries on your credit file.
   Applying for loans with multiple providers can have a large impact on your credit rating if they each do a credit check. At the same time, it’s good to have some activity on your credit file to show a track record of paying on time. Keep a balance between the two.
   
   
5. If you’re experiencing financial difficulties, call your credit provider and negotiate a payment plan with them.
   This can prevent a default being listed on your credit file, which essentially means you’ll be less likely to receive a record of your failure to pay on time in the system. If you get a credit default listing, lenders will see that you have a negative credit history – which ultimately damages your overall credit score. Avoid this by telling your provider if you hit a rough patch and repayments are slow. It’s okay, life happens.
   
   
6. Identify any areas of concern on your credit file and aim to fix them. There may be an outstanding debt you don’t know about or errors on your file.
   Familiarise yourself with your own credit score and actively work towards fixing it if you know it could be better. It’s the small things over time that can lead to a slow build-up of a low credit rating. Be mindful of all your debt and learn to iron out those kinks every once in a while.
   
   
7. If there are errors on your file, have them fixed by contacting the ratings agency or the credit provider.
   Aim to settle any outstanding debts. Remember to keep on top of it and show lenders that you’re reliable – give them a good look into your credit history and how well you managed to resolve financial difficulties.
   
   

How long does it take for your credit rating to improve?

Well, that depends. There’s no set amount of time it’ll take for you to get your credit rating back on track. All of this depends on how serious your repayment issues were and the impact it had on your rating over time. For some, it’ll only take a few months to get it up to scratch. For others who aren’t so lucky, this process could take years. It all goes back to that trust-building process – if you break somebody’s trust, building it back up again will depend on how badly you were at fault.  

The best way to improve your credit rating is to practice good credit habits. Do that, and you’ll get into the groove of having a decent credit score.

Do savings improve your credit rating?

Being a decent saver won’t change the score of your credit rating. Lenders want to see how well you manage your money, not how well you hold onto it. It’s great to know that you’re not living pay cheque to pay cheque (good on you) – but it’s more about your ability to pay on time.

In saying this, the one thing that savings can help you with is to paint a picture for your lender. They can use this information about your savings to decide whether you can handle debt.

So, there it is! Pretty simple stuff once you wrap your head around it. Practice a habit of being switched on about the money you borrow. If it helps to keep a record of your larger spends – do it. If it helps to put in a reminder for all your bills coming through – do it.