6 common mistakes that can lower your credit score
As of the 12 March 2014 Australia adopted Comprehensive Credit Reporting (CCR). Since then, both the number of institutions reporting and utilising comprehensive credit data has increased significantly.
1. Owning too many credit cards and/or playing the rewards points game
While offers to sign up for credit and department store cards with free gifts or rewards points may be tempting, having access to all of that credit may be detrimental to your credit score because, even if you don’t use the cards, potential creditors may worry that you won’t be able to repay a new obligation if you decide to use all that credit. Plus, all those ‘enquiries’ on your credit report may indicate to lenders that you are having financial troubles or are on the verge of getting too deeply into debt. Which leads us to…
2. Number of credit enquiries and credit shopping patterns
Every time you apply for credit and a credit provider obtains a copy of your report, an enquiry is added to your credit report. This can include any loan, mortgage or utilities applications you may make. Shopping around for credit and applying to a number of different credit providers within a short space of time may negatively impact your credit score. It flags you as a greater risk than infrequent applications for credit with a few credit providers.
One way to avoid this damage when seeking out competing offers from loan providers is to use a finance broker. A good finance broker should be adequately equipped to provide you comparative pricing and prequalification with the need for only a single credit enquiry being listed.
3. Type of product & credit providers you are applying with
The type of product, credit provider and credit limit associated with a credit enquiry may impact your credit score. For example, there may be different levels of risk associated with approaching a bank, store finance provider, or utility company for credit and say, a payday lender. Similarly, applications for mortgages are seen as less risky than applications for credit cards, personal loans and store finance.
Research also shows that there’s a different level of risk associated with lenders in particular industries for example a non-conforming lender may have a different level of risk than a bank or credit union. As such, applications to payday and non-conforming lenders can often be seen as a red flag and have a negative effect on your credit score.
In short, if you are interested in maximising the likelihood of having a high credit score, steer away from applying to payday lenders, high interest non-conforming lenders and high interest unsecured credit such as credit cards.
4. Paying bills late
One of the biggest factors in determining your credit score is your past payment history. While one or two late payments on your credit cards, loans, or other important obligations over a long period of time may not significantly damage your credit record, making a habit (or mistake) of it can count against you.
If you don’t pay at least the minimum amount due, as of 12 March 2014 repayment history information, such as if you make your credit card and loan repayments on time, can be held on your credit report. Whilst one late repayment, depending upon how late it was, followed by making your repayments on time, may not significantly impact your credit worthiness, a number of late payments could be an indication you are in financial stress and may negatively impact your credit report.
Similarly, if you ‘max out’ or already owe a lot of money on your credit cards, potential creditors may question your ability to repay. Creditors also use this information to evaluate loan approval or interest rate charges (higher interest rates are used to compensate for higher risk).
Similarly, for utilities providers, under the Privacy Act 1988, an overdue debt can be listed on your consumer credit report when it is overdue by 60 days or more, when the debt is at least $150. Please note that information about whether your have paid your account on time or not cannot be listed by a telco or utility provider as they are not a licensed credit provider, unless you are 60 days or more overdue.
Before listing a default, the credit provider must have sent a written notice seeking payment of the overdue debt and a written notice stating that the default may be listed with a credit reporting body.
Once you’ve paid the overdue debt, the credit provider is required to update the listing on your credit report to ‘paid’ as soon as is practicable.
If the overdue debt is classified as a serious credit infringement, where you have left or appear to have left your last known address, the credit provider must first have listed a default and must have had no contact with you for the preceding 6 months.
5. Not ensuring your creditors and reporting agencies hold accurate information on you
If you move between apartments frequently and don’t change your address on bills, you run the risk of not receiving bills on time and suffering late payments as a result. Similarly, not notifying creditors of a name change could result in your credit report not accurately reflecting the credit you’ve worked to build.
Many people never look into their credit report until they’ve been denied for a loan or credit. Inaccurate or missing information in your credit report could raise your borrowing costs or cause delays when you’re in a rush to make a major purchase, like a car.
If you are looking to check what kind of information credit reporting agencies hold on you, you can obtain a copy of your credit file for free directly from the agencies themself using the links below:
It’s worth noting that you should be wary of any online service provider offering to provide you a copy of your score or credit file instantly ‘for free’. Such services are actually elaborate data mining tools for marketing purposes whereby you grant access to your private information in exchange for avoiding a charge that Veda or Experian may wish to bill you for providing that same service.
Furthermore, it is worth taking steps to actively protect your credit profile from identity theft and manipulation by malicious third parties. Identity theft has risen in prevalence in Australia and, in short, it typically involves criminals using your credit profile to procure loans under your name. Such damage can take months and a large amount of effort to undo, services like Veda Advantage’s SecureSentinel proactively monitor your credit profile and identity to prevent such issues from occurring as well providing you insurance to cover you in the event that you fall victim to such a crime.
6. Getting refused for credit
If you’ve been declined for credit by one credit provider and you continue to make a number of applications, the resulting enquiries on your credit report will negatively affect your chances of obtaining credit in the future.
From 12 March 2014 information on when an account is open and closed can be held on your credit report. This, together with your repayment history, will help lenders get a clearer picture on your credit obligations and can be taken into account in their assessment a credit application you make.
If you’ve been refused credit, you have a right to obtain your consumer credit information free of charge within 90 days of being declined credit.
Would you like some help navigating the credit gauntlet?
The team at Naritas are experts in delivering timely guidance & finance approvals. We have over 100 lenders on our panel & a high quality team of dedicated credit advisers to steer you efficiently through the approval process.