Credit rating: Why does it matter for you (and the lender)

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Credit ratings. You hear a lot about them but there’s not much out there actually explaining what a credit rating is, and what lenders use to calculate them. So, here’s the lowdown.

What is a credit rating?

Lenders use your credit rating to decide whether to approve you for credit or lend you money. In simple terms, the rating helps them understand how likely you are to pay back any money they lend to you.

That means, whether it’s a credit loan, business loan or a home loan, your credit rating is a key metric lenders analyse in the approval process. It can also affect stuff like approvals for mobile plans, power or water, and bank overdrafts.

When it comes to the rating itself, it’s usually a score from 0 to 1200 or 0 to 1000. The higher the number, the less likely lenders think you will default on the loan.  It’s worth taking the time to get your rating in decent shape as information can stay on it for years.

Where do I find my credit rating?

Credit reporting agencies, the companies that compile your credit rating, usually use a five-point scale — excellent, very good, good, average and below average — with people at the bottom of the ladder, down near zero, commonly finding it challenging to access credit.

You can get a copy of your credit report and credit score for free every 3 months by contacting a credit reporting agency like Equifax, Experian or illion.  There are also online credit score providers that will give you your credit rating, usually in a matter of minutes, in return for you letting them use your personal information for marketing purposes.

How’s my credit rating calculated?

This is what can seem so mysterious. You may think you have a pretty good history on credit, but then get a nasty shock when you get a look at your actual credit rating.

So what exactly is taken into account to work out your credit rating? According to the federal government, your credit report, which is the official document that contains your credit rating, includes personal information like your name, date of birth, address and driver’s licence number as well as info from your financial past.

Once you get past all that, then comes the important stuff. This is the information that pertains to your credit rating and includes any defaults on utility bills, loans and credit cards, your repayment history, previous credit applications, bankruptcy and debt arrangements if you have any, and previous credit report requests.

How can I boost my credit rating?

There’s no silver bullet here, but there’s certainly lots of things you can do to help bolster your credit rating. Simply put, it comes down to being on top of your finances. It’s mostly action like paying bills on time, making minimum repayments on credit cards and personal loans, and regularly checking your credit score to make sure no errors have occurred.

On the flip side, you also need to ensure you’re not doing things that will damage your rating and see you slip down the credit score ladder. On this front, it’s a good idea not to do things (if you can avoid it) like maxing out your credit card, missing loan repayments, making multiple credit applications in a short space of time, or getting court orders made against you for outstanding debts. That last one in particular is sure to hit your credit rating hard.

Remember, whether you’re just applying for a new credit card or looking to make a big life decision like buying a new home, lenders will likely examine your credit rating before approving your credit application. So take the time to get yours looking as good as possible.

Information provided in this article is of a general nature only and we have not taken your personal financial objectives, situation or needs into account. We recommend you consider if you need to seek professional financial advice before making any financial decisions.

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