Credit Score - What is it & how does it affect you?
A credit score is a numbering system giving to a person’s risk to a lender, in obtaining credit. Furthermore, there have been some recent changes to how the scoring system works. As such, the new credit reporting system is called "Positive Credit reporting" and is a change from the current "Negative credit reporting". Consequently, the positive system gives a more detailed analysis of your credit history. As such, this achieved by reporting on credit repayment history along with defaults.
What are Credit Score Numbers?
The credit score is an automated number derived from your credit payment history; as well as other factors. As such, see below a credit scoring table from an actual credit report. Note, the number range starts at -200 and continues to +1200. Generally, the numbers in the green area are good. Although, other factors affect the score, such as the age of the credit file. Also, time living at an address, the number of applications for credit, and the type of credit enquiry.
How do score numbers affect credit?
Scoring affects virtually any product or service that has credit terms. As such, this is a wide range of products with the potential to affect our credit file. However, the most direct impact you will find is when you lend money.
Consequently, lenders have different acceptable scores for approving loan applications. Generally, if a score is in the green, you're credit report would be satisfactory for a loan application; although other loan requirements would also be required.
For example, see key factors for credit scoring, as noted in figure 3 below.
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Uses of Credit Score
Maintaining a good score is very important in obtaining finance. Particularly, since the introduction of positive credit reporting. Although, there have always been several lenders using some form of the scoring system in their application assessment.
Recently, Veda (now Equifax) started a positive credit reporting model. As such, most lenders now are using the new system over the old negative reporting system. Consequently, as applications move to electronic lodgement and online applications, so to will the reliance on automated credit scoring methods.
If you have found you are having issues with loan applications; this may be a credit issue. However, Loan Saver Network offers a free credit file with all loan assessments. Therefore, contact us via the online enquiry form or call us to discuss your problem.
How is Credit Score Calculated
Your credit score is an automatic calculation. As such, it is generated using data input by your loan enquiries and ongoing credit. Also, there is other information used, such as current and past addresses, plus the age of the credit file. Although, the actual algorithm to ascertain the score is not available; however, it's not too difficult to understand how the score is affected.
Information that contributes to your Credit Score
- Firstly, credit applications - the number of credit applications gives an indication of the need for finance and the applicants state of mind. Also, if there are excessive application enquiries, this can depress your score.
- Secondly, the number of application for the credit should be limited to no more than 2 in 12 months to maintain your credit score. Therefore, online credit applications & searches for credit can impact your score. Indeed, some information gathering sites request you to authorise access to your credit file and are credit applications.
- Thirdly, the types of credit you apply for affects your credit file. Example, if you apply for finance through a payday lender, this will severely affect your score. Certainly, personal payday enquires can prevent any chance of obtaining traditional finance. For this reason, applying for payday finance indicates you have an extremely urgent need for a small amount of money. Consequently, showing the client as high risk.
- Finally, multiple changes in addresses - this has an effect on a credit score based on stability. Importantly, As cars are moveable assets, vehicle finance applications require residential stability. As such, lenders who provide finance for movable assets like to have a stable residential record, so they know where to asset is stored.
Negative Score Information
- Repayment History - along with positive credit reporting, one of the changes implemented is the recording of your repayment history on credit cards and other credit. As such, your credit file records credit repayments on your credit file for two years. Therefore, if you are late greater than 30 days on a payment, it will be recorded on your credit file.
- Importantly, a credit default has a severe negative effect on your credit score.
- Also, Court judgements or being a director of a company in liquidation or wind up proceedings, court writs, clear outs.
- Plus, bankruptcy deletes your credit score. Therefore, your credit file will indicate no score available. Also, this is the same for all the sections of the bankruptcy act. Including, part 10 Insolvency (Personal Insolvency Agreement - PIA) and Part 9 Debt Agreement.
Your credit score is a significant part of the loan assessment criteria. More importantly, when applying for traditional finance as this group of lenders uses scoring for part of their loan assessment. Consequently, if you are seeking finance, feel free to call Loan Saver Network for a free and confidential loan assessment on 1300 796 850.