Understanding your credit score and how to improve it

GUEST OBSERVATION

Looking closely at the new credit reporting system introduced in March this year leaves many people feeling a little overwhelmed.

But the first step to making any step forward, especially with your finances, is to get educated.  If you missed part one, check it out here to get up to speed on the changes and what it means for you as an investor.

Having seen how the consequences of credit reporting adversely affects my clients, I feel that there should be greater control on what is placed on someone’s credit file before it’s registered. The onus should not be on borrowers’ to later prove that any one item shouldn’t be there.

You’re probably curious whether there is any good news? Yes! In fact, the great news is that there are lenders that don’t use credit scoring in conjunction with the credit report. I hope that this remains the case with the changes.  These lenders look at the logic of the credit report history.  For example an active investor could have multiple enquiries if they were restructuring a loan as well as completing two purchases  - this isn’t necessarily a bad thing.

The other lenders that rely heavily on the scoring actually lose the opportunity to build relationships with strong clients.  Now, you may assume that lenders that use the basic credit fundamentals instead of credit score systems are second-rate lenders, though they’re certainly not, nor do they charge higher rates. In fact in some cases, their products are often better and we need to start rewarding these lenders with our business, and reduce the market share of the big four.

It’s extremely important that every person understands what credit suitability means and manage their own accordingly. You want to do this before you apply for a loan to avoid any nasty surprises during the application process.

Steps to accessing and understanding your credit score.

1. Get a copy of your report ASAP from Veda.
   
   
2. Review this carefully and highlight any errors.  Then you’ll need to begin the process of removing them. This isn’t an easy process and whilst there are some good companies out there to assist be wary of scams. I encourage you to do due diligence carefully before engaging these companies.
   
   
3. Assess your own risk. Would you really lend yourself money? What is your relationship with money and how you handle debt?  Do you go from job to job and have no stability?

Ways to improve and manage your credit situation.

• Pay your all loans on time (it does matter if it’s one day later) and keep your credit facilities under the limit. Also pay other accounts like telephone, rates, Foxtel on or before the due date.
  
  
• Be still. Manage your stability and changing jobs every three months isn’t going to help your credit score and no doubt is a sign that you aren’t happy and need to look at what is causing this job dissatisfaction.  This doesn’t mean don’t ever change or follow your career path but applying for loans in the middle of a changeover doesn’t help your application.
  
  
• Complete a budget and review regularly to ensure you know your numbers.
  
  
• Don’t apply for unnecessary unsecured personal debt & don't chase the 0% interest balance free transfers.  It can cost you a lot more than the interest you are trying to save.
  
  
• Use a good mortgage broker that knows lenders policy and do as much work upfront like valuations and also credit checks to improve your chances of getting approved at the lender you apply for.

Remember, lenders will lend based on risk before profit.  Manage your credit file, limit your bad debt, be an example of stability and you can have a better chance of obtaining good debt to start or grow your investment property portfolio.

MICHELLE COLEMAN is an award winning finance broker and managing director at W Financial.