Like many of you, I graduated from high school and university with no PRACTICAL knowledge of how finances, accounting or businesses worked in the ‘Real World’ (this coming from a postgraduate student who majored in accounting and finance!). I realised shortly after graduating that the world out here and the bubble in there had no real correlation at all.
Today’s edition is dedicated to all of you feeling the same way I did coming out of school. It’s time to understand what a credit score is, why it’s important and how you can build and reshape it in order to create a more financially sound future for yourself.
WHAT IT IS
Credit scores allows lenders to view your capacity to borrow. In simple terms, it’s a reputation as a borrower so that lenders can see how you behave and manage any present or future credit cards, personal/business loans and home loans. Your past and current financial position allows lenders to see how likely you are to repay your loans and whether or not they should approve any loans in the first place.
Some scenarios of when your credit score may be checked are included in the following table below:
|HOME LOANS||CREDIT CARDS||PERSONAL LOANS|
|BUSINESS LOANS||INSURANCE||EMPLOYMENT CHECKS|
WHY IT’S IMPORTANT
You may have stumbled across a widely viewed Netflix science fiction series called Black Mirror. Season 3 episode 1 ‘Nosedive’ presented an alternative reality where your views and actions impacted your socioeconomic status by way of a rating system. Your overall rating would determine whether you could get the house you wanted, future finances and the right job in the right field. Flip this back to our reality and you have what is known to us as a Credit Score. It widely determines whether banks will lend to us, the kind of interest charges you may have and even determine whether you’re an eligible employee candidate for the next job opening.
Below is a table which summaries the credit rating brackets from Equifax and how they perceive your performance level from weak/below average to excellent.
CREDIT REPORTING BODIES
A credit reporting body (CRB) or credit bureau is a body that collects, holds and distributes all readily available financial information on a borrower from their credit providers (credit card company’s, banks etc.). The bodies then use this information in order to calculate a credit score which determines your reputation as a borrower.
Currently, Australia has 4 major CRB’s:
- Dun & Bradstreet
- Tasmanian Collection Services
FACTORS AFFECTING YOUR SCORE
The major factors affecting your credit score are included in this table below:
|FACTORED INTO CREDIT SCORE||PERCENTAGE|
|Your payment history on all loans||35%|
|Amount of all loans owed||30%|
|Life of each loan (loan terms)||15%|
|Type of loans||10%|
|New loan applications||10%|
NOTE: loans that also haven’t been used but are open to you are factored into your Credit Score.
Different CRB’s use different credit scoring models and some banks also generate their own operating systems which create an internal credit score which they instead use. Owning a perfect score is, therefore, highly unlikely or very unusual to come across as different methods can alter your score. A score that keeps you between the ‘Very Good’ and ‘Excellent’ credit brackets is considered a very good position for your financial and professional position.
CHECK YOUR CREDIT SCORE
Click any of the links below to order your free credit score now! (You can view your credit score for free once every 12 months).
Steven Wong Accountants
Accounting for Growth