Special Feature: What’s your credit rating?

Most people don’t pay much attention to their credit rating, and generally you don’t need to. Play the game right though and when the time comes to get a loan or apply for a new service you’ll be ahead of the pack.

Credit traps

If you don’t think about your credit rating, move house a lot or share with people who are unreliable bill payers you might get a nasty surprise when you do eventually want to buy a car, start a business or get a home loan. If you have unpaid bills, or are consistently late at paying your bills, your credit rating will be poor. Your loan application will be refused and you’ll have to take steps to redeem yourself, or you may want to change phone or Internet providers but have your application rejected.

A classic story is that of the unpaid phone bill – of all the utilities Telstra is one company you can probably never get away from. You’ll be listed as a bad debtor and your history will chase you and eventually catch up with you (even if you never sign up for another Telstra service). It’s not enough to say “I didn’t know I had a bill outstanding” – if you’ve moved and your mail hasn’t caught up with you the creditor won’t care. Until the bill is paid your ability to secure credit will be impaired – and for quite a while after the debt is cleared you will have a black mark against your name.

How do I find out what my credit rating is?

There are services in Australia that, for a fee, can compile a credit report for you. Veda Advantage is the largest collector of consumer and business intelligence in Australia and supplies information to businesses, upon which they base their decisions to provide credit or services to customers. You can get a copy of your credit rating report from them. Experian and MyFico also offer credit report services.

Does my credit rating matter?

It is considered a sound financial practice to regularly check your credit rating, just as it is wise to keep an eye on your bank or credit card statements. Increasingly businesses are seeking information relating to customer’s credit ratings before entering into a relationship with the individual or company. This means your credit rating is probably more important now than in previous years. Being refused as a customer can be not just embarrassing but a huge hassle as you must then seek out alternative providers.

In addition, having access to your own credit file will enable you to see who has has been accessing your information. Many credit services will allow you to decide when and how often you can check your file. Identity theft is becoming more prevalent – another good reason to take a look at your credit report.

Who decides what your credit rating is?

Who rates you? Well, the good news is you are in control of your credit rating. Each time a bill goes too far overdue or, even worse, goes unpaid, that information is uploaded to a central system, such as that collected by Veda Advantage. From there it can be accessed by businesses that subscribe to their service. Pay your bills on time (or by direct transfer) and you can be confident your credit rating will be a healthy one.

There are several easy steps to take to ensure a “credit worthy” status. They are:

  • Pay bills on time
  • Make sure to call credit providers as soon as possible if there is ever a problem making payments on time
  • Regularly check your credit file to make sure it is accurate
  • Monitor your credit file to make sure there is no fraudulent use of your identity
  • Always ask why credit has been declined – it may not be your rating, but a policy of the business at the time of applying.

It pays to remember that details of overdue accounts and payment defaults stay on your credit history for five years, even after the bill has been paid. One bad year will haunt you for five so try to stay on top of things. If, for some reason, you can’t manage your bills communicate with your service providers before the late payment becomes an issue. This will help to preserve your good name.

Impact of a bad credit rating

A credit rating is usually based upon a compilation of all the information relating to your credit activities over a seven year period. A lot can change in seven years, especially for young people. As a teenager, when you may get your first credit card or mobile phone plan, you may not really care too much about your credit rating. Later on, these young people may discover a few years down the track that unpaid bills and a bad history cost them approval for a home loan and their first home.

Sub-prime lenders

There has been a rise in the number of organisations that will offer credit to people with a bad credit rating. These organisations are called sub-prime lenders. However, the interest rates offered by these companies tend to be higher and the fine print may also be a bit nastier. Borrowing from a sub-prime lender is not ideal but if this is the way you have to go be sure there is a clear repayment plan and make sure you take a detailed look at the fine print. High interest rates and repayments can create a downward spiral for many, ensuring that a bad credit rating continues for another seven years.

Budgets and financial planning

Making sure not to extend yourself beyond your financial capabilities will help you to always maintain a good credit rating. To help you stay on track, do a budget, get professional financial advice and cut up your credit cards. As gaining access to many services these days is dependent upon having a good credit rating keeping your credit rating top of mind when making purchases and managing your affairs can help to simplify your life, reduce financial stress and has the added benefit of preventing fraud committed in your name.

Credit repair

There are companies that specialise in helping you to repair your credit rating so you can move on with your life, get business loans and start successfully planning for your financial future.

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