Many Aussies don’t know their credit score but it's often more about complacency than fear. If you have paid your bills, overdrafts and loans off pretty responsibly the chances are that your credit report is pretty healthy and that banks and other lenders will see you as a good risk.
In order to help your credit rating, you must be diligent with your financial commitments as much as you can. No-one is perfect, but if most of your payments are on time and you check your credit report frequently, you're demonstrating that you can deal with money pretty well. If you're about to apply for a personal loan, however, then you need to think about the negative consequences that it could have as well as the good.
Ideally, to avoid taking on more debt than you can comfortably handle, you should make sure you're looking for the best personal loans possible by using a personal loans comparison tool. These tools can help you to select a loan that suits you and gives you "wiggle room" for extra payments each month if you need to speed things up.
If you have an average or poor credit history, it can be tempting to take out a personal loan to ‘build your history up’, but here’s a few things you should know first.
What will your credit report actually feature?
The good news is that credit reports have changed - for the better. If you haven't looked at or thought about your credit report since before 2014 then you'll be delighted to know that it doesn't just feature the bad news.
Order your credit report now and you'll find that it includes the good bits as well, like the fact you're prompt with your utility bills, credit card payments and any other loans or debts you have. It'll also feature information like your credit limits on your cards, as well as the sorts of bank and store accounts you've held in the past and whether you've closed them, maintained them or had them closed for you.
Good handling of credit cards, mortgages, rental agreements, insurance policies, phone bills and personal loans shows that you have a good grasp on finance and organisation. All of these factors are a huge help when it comes to applying for more, or entirely new, credit, including large and small personal loans.
This is part of what’s called Comprehensive Credit Reporting, or CCR, and while it’s more in-depth, it will also include credit enquiries such as applications for personal loans. This can feed in to your credit score.
|
Credit score range |
illion |
Equifax |
Experian |
|
Excellent |
800 to 1,000 |
853 to 1,200 |
800 to 1,000 |
|
Very good |
700 to 799 |
735 to 852 |
700 to 799 |
|
Average |
500 to 699 |
661 to 734 |
625 to 699 |
|
Fair |
300 to 499 |
460 to 660 |
550 to 624 |
|
Low |
0 to 299 |
0 to 459 |
0 to 549 |
How can I get my credit report?
In Australia you can get your credit report for free once per year through one of the three main credit rating agencies - illion, Equifax, and Experian.
This is for an in-depth report, with all the nitty gritty of what’s on your file. This will count as a ‘soft’ credit enquiry on your report, and you’ll see it in your history.
If all you want to see is your score, various sites offer free credit score checks and they are usually powered by the big three agencies. Your banking app might also now feature a credit score checker, such as CommBank’s NetBank app.
How personal loans can affect your credit rating
Positive: Paying it off on-time and meeting repayment deadlines
Paying off your personal loan regularly and on time is good news for your credit rating. If you have a couple of late payments it's not a disaster, but if you're regularly missing repayments and you're gathering late fees and arrears charges, then you'll really hurt your score.
If your payments are over $150 and they're more than 60 days late, you may be deemed to be in default which is very bad news indeed.
When you're applying for loans or any other sort of credit, you need to weigh up the benefits of paying it off on time against the risk of not being able to make the occasional payment when it's due.
Positive: Have a look at debt consolidation loans
One big way a personal loan can really improve a fledgling credit score is to consolidate your debts into one loan and pay it off.
This is also a psychological ploy as well, as having multiple debt bills can add to your stress, and if you’re really behind, it can be a minefield trying to decide which one to prioritise. Having one bill eliminates that stress.
There are plenty of personal loans designed just for consolidating debts. You can pay off your credit card, store cards and other loans with one debt consolidation personal loan. A demonstrated history of getting on top of your finances and steadily repaying one personal loan can go a long way in repairing your credit score.
However you’ll also need to keep in mind that a debt consolidation loan is essentially another loan. You want to use this opportunity to get on top of your finances, not add to the debt burden. Avoid taking on any new debt or making big purchases on your credit card.
Positive: A thin credit file is better than a bad credit history
If you’re new to the finance world, such as a recent immigrant or student, it can be tempting to think you need to ‘built up your credit’ and get a personal loan. While it is true it will beef out your history, it might not be for the better.
A home loan lender or secured car loan lender would rather you have a thin file and an average score, rather than a beefy book of multiple personal loans in a short timeframe and multiple credit cards, or applications and rejections.
Further, if you’re new to Australia or a student, there’s every chance you could be knocked back for credit because you don’t have a solid income history - this doesn’t reflect well in your credit report.
You might be surprised to know you can build your credit history by paying off your phone plan and energy bills on-time.
Neutral: Paying off personal loans early doesn't help
You might think that paying off your personal loan earlier than you agreed looks good on your credit rating, but it doesn't actually make any difference. You may have decided to bring some personal loan credit into your finances to show how well you deal with instalment credit over a longer period of time, so ending the agreement (even on a high note) defeats the purpose. The longer and more consistent your record of paying down your debts is, the better your score will be.
If you're feeling overwhelmed by your loans or if your circumstances change, then paying your loan off early is more important than your credit rating. You should aim to make additional payments each month, or pay off a big chunk with a bonus from work or similar, just to reduce the balance and the interest you'll ultimately pay.
Negative: Don't keep applying for loans
Another important thing to remember, when it comes to applying for unsecured or secured personal loans, is that each application you've made in the last five years goes on your file as hard credit enquiries. If you've been approved and handled the subsequent loan well, then your rating will probably be good enough to get some really great personal loan rates.
If you tend to get your applications (or enquiries) rejected, then your rating will drop and you should avoid further applications until you identify the reason for rejection and take steps to rectify it. Steps for rejection could include not having steady income, or if you have had a change in personal circumstances in the past few months, such as a new job, a baby, or a home purchase.
Negative: Don’t add to your debt burden and miss repayments or default
It can be tempting to apply for a personal loan to build up your credit history. However you’ll need to see how it works into your budget with a personal loan calculator.
Further, you’ll also want a solid purpose for taking out a personal loan beyond just enhancing your lifestyle or buying a lot of frivolous items. Personal loans are commonly used for home renovations, vehicles, holidays, and weddings.
It’s no use taking one out then realising you can’t fit it into your budget, falling behind on repayments then defaulting. This defeats the whole goal of ‘building up your credit file’.
You will also need to consider that you’re paying interest. This can add up to thousands of extra dollars over the life of the loan. Unless you’re using a personal loan for a big expense, consider if that money spent on interest could be better directed elsewhere.
