Your credit score is a number that helps lenders work out how safe you are to lend to. It’s based on information in your credit report, such as your history of borrowing and whether you’ve made your repayments on time. If you have a low credit score, you may be seen as a higher risk and some lenders may be reluctant to give you a loan or credit, or they may charge you a higher interest rate compared to someone with a good credit score.
A low credit score may seem like a deep hole to dig yourself out of, but it’s not impossible to recover from. That being said, improving your credit score may require some discipline and work on your part.
How can you improve your credit score?
Some strategies that could help you to build up your credit score include:
1. Pay existing loans and debts on time
A record of consistent and punctual payments can contribute to a stronger credit score. Since the introduction of comprehensive or ‘positive’ credit reporting, positive data (such as making your repayments on credit or loan products on time) can now be included on credit reports. On the flipside, if you miss your repayments this can also be recorded and can have a negative impact.
2. Pay bills on time
Paying your telco and utility bills on time can also help improve your credit score. This is especially important if the bill in question is worth $150 or more. If the payment is more than $150 and at least 60 days overdue, then a default may be listed on your report. Defaults are one of the more significant black marks that can show up on a credit report. Defaults will stay on your report for five years. Consider setting up automatic payments to help you stay on top of your bills, and make sure to notify phone and utility providers if you move home, so bills in your name aren’t going unopened. You could also ask your utility providers if you can receive your bills via email.
3. Think carefully before applying for any new credit
Whether you get approved or not, the fact that you applied for a new credit or loan product will show up on your credit report, which in turn may affect your credit score. If you make multiple applications for credit within a short space of time, this can flag to lenders that you are in credit stress and may have a negative impact on your score.
That being said, applying for credit to replace or better structure a credit product – such as taking out a credit card with a balance transfer offer or a personal loan to consolidate debt – may ultimately help you get on top of your debt, improving your credit score in the process. However, this would require you to genuinely pay down your debt, and not simply move it around. Be careful with this strategy, as each credit application is recorded on your credit report and lenders may still view it as a red flag if they see a pattern of lending applications.
4. Contact your credit provider or a financial counsellor if you need help
If you are finding it difficult to manage your repayments or bills, you can ask your credit provider or service provider for financial hardship assistance. You might also want to contact a financial counsellor for help. Financial counsellors provide a free, independent and confidential service, and they can help you with things like developing a budget and negotiating with your creditors.
Be careful of companies that charge you to “repair” or “clean” your credit report. You cannot pay to remove information on your credit report that is correct, even if it is negative.
5. Check your credit report for any inaccuracies
It could be worth checking your credit report carefully to ensure all the information listed is accurate. If your credit report does contain incorrect information, it could be having a significant impact on your overall credit score.
Examples of potential credit report inaccuracies could include:
- Incorrect debt amounts or duplicate debt listings
- Debt you didn’t take out being shown (this can be a result of identity theft or other fraudulent activity)
- Repayments you made not being recorded
By cross-referencing your credit report against bank statements and other financial documents, you may be able to spot any inaccuracies on your credit report. You can then contact your credit provider or the credit reporting body and ask them to amend your report. In turn, this could help to improve your credit score. You can request a copy of your credit report from Australia’s three main credit reporting bodies: Equifax, Experian, and Illion.
6. Hold onto credit cards you can manage
Keeping hold of credit cards that you can manage and paying them off each month may actually be beneficial. This can help you demonstrate a positive repayment history and improve your credit score.
However, it’s important to be aware of the costs and risks involved. For example, it can be easy to build up debt on a credit card, which could incur a high rate of interest, and your score may be negatively affected if you miss your repayments. Remember that you don’t need to have a credit card to establish a credit history.
7. Lower the limit on any credit cards you have
If you have any credit cards open in your name, you could consider reducing the credit limits. This will put a firmer limit on the amount of debt you can accrue. It could also help to improve your credit score, according to Moneysmart.
If you’re currently comparing credit cards, the comparison table below displays some of the low rate credit cards currently available on Canstar’s database for Australians looking to spend around $2,000 per month. Please note that this table features links direct to the providers’ website, and is sorted by Star Rating (highest to lowest), followed by provider name (alphabetical). Use Canstar’s credit card comparison selector to view a wider range of credit cards.
Although your credit score won’t completely change overnight, it can improve over time; for example, as more positive information is added to your report and negative information (like missed repayments and defaults) eventually drops off.
For more information on credit scores, visit our credit score information hub. You can also check your credit score for free.
Cover image source: garagestock (Shutterstock).