Common Credit Score Mistakes to Avoid in Australia
Your credit score is a three-digit number that represents your creditworthiness. It's a key factor lenders consider when you apply for a loan, credit card, or even a rental property. A good credit score can unlock better interest rates and more favourable terms, while a poor credit score can limit your options and cost you more in the long run. Many Australians inadvertently damage their credit scores by making common mistakes. This article outlines some of these pitfalls and provides practical advice on how to avoid them.
What is a Credit Score and Why Does it Matter?
Before diving into the mistakes, it's essential to understand what a credit score is and why it matters. In Australia, credit scores are typically provided by credit reporting bodies (CRBs) like Equifax, Experian, and illion. These scores are based on your credit history, including your payment history, the amount of debt you owe, the length of your credit history, and the types of credit you use.
A good credit score demonstrates to lenders that you are a responsible borrower who is likely to repay your debts on time. This can translate into:
Lower interest rates: Lenders offer lower interest rates to borrowers with good credit scores, saving you money over the life of a loan.
Higher credit limits: A good credit score can qualify you for higher credit limits on credit cards, providing you with more financial flexibility.
Easier loan approvals: With a good credit score, your loan applications are more likely to be approved.
Better rental opportunities: Landlords often check credit scores to assess the risk of renting to a tenant. A good credit score can increase your chances of securing your desired rental property.
Access to essential services: Some utility companies and mobile phone providers may check your credit score before offering you a service.
1. Missing Bill Payments
Missing bill payments is one of the most detrimental things you can do to your credit score. Even a single late payment can negatively impact your rating. This includes payments for credit cards, loans, utilities, and even mobile phone plans.
How it Impacts Your Credit Score
Credit reporting bodies track your payment history, and late payments are reported to them by lenders and service providers. These late payments stay on your credit report for a certain period, impacting your score during that time. The more frequently you miss payments, and the longer you take to catch up, the more significant the negative impact will be.
How to Avoid It
Set up automatic payments: Automate your bill payments to ensure they are always paid on time. Most banks and service providers offer this option.
Use calendar reminders: If you prefer to pay manually, set up calendar reminders to remind you of upcoming due dates.
Budget effectively: Create a budget to track your income and expenses, ensuring you have enough money to cover your bills each month.
Contact your provider: If you are struggling to make a payment, contact your provider immediately. They may be able to offer a payment plan or other assistance. Remember, it's always better to communicate than to simply miss a payment.
2. Exceeding Credit Limits
Exceeding your credit limit on a credit card can also negatively affect your credit score. It signals to lenders that you may be struggling to manage your finances.
How it Impacts Your Credit Score
When you exceed your credit limit, your credit utilisation ratio (the amount of credit you're using compared to your total available credit) increases. A high credit utilisation ratio can lower your credit score. Lenders generally prefer to see a credit utilisation ratio below 30%.
How to Avoid It
Monitor your spending: Keep track of your credit card spending to ensure you stay within your credit limit. Many banks offer mobile apps and online tools to help you monitor your spending.
Request a credit limit increase: If you consistently find yourself close to your credit limit, consider requesting an increase from your bank. However, be sure you can manage the increased limit responsibly.
Make multiple payments: Instead of waiting until the end of the month to pay your credit card bill, consider making multiple smaller payments throughout the month to keep your balance low. Explore what Findoutmycreditscore offers to help you stay on top of your credit health.
3. Applying for Too Much Credit
Applying for multiple credit cards or loans in a short period can also lower your credit score. Each application triggers a credit inquiry, which can slightly reduce your score.
How it Impacts Your Credit Score
Each time you apply for credit, the lender will check your credit report, resulting in a "hard inquiry." While a single hard inquiry has a minimal impact, multiple inquiries within a short period can signal to lenders that you are desperate for credit, which can lower your score.
How to Avoid It
Apply for credit only when necessary: Avoid applying for credit unless you genuinely need it.
Space out your applications: If you need to apply for multiple credit products, space out your applications by several months to minimise the impact on your credit score.
Shop around strategically: When shopping for a loan, try to do your rate comparisons within a short period (e.g., 14-30 days). Credit scoring models often recognise that you are shopping for the best rate and may treat multiple inquiries within that timeframe as a single inquiry. Learn more about Findoutmycreditscore and how we can help you understand your credit profile.
4. Ignoring Credit Report Errors
Your credit report may contain errors that can negatively impact your credit score. It's crucial to regularly check your credit report and dispute any inaccuracies.
How it Impacts Your Credit Score
Errors on your credit report, such as incorrect payment history, accounts that don't belong to you, or outdated information, can lower your credit score. These errors can make you appear to be a higher-risk borrower than you actually are.
How to Avoid It
Obtain your credit report regularly: You are entitled to a free credit report from each of the major credit reporting bodies in Australia every 12 months. Take advantage of this and review your report carefully.
Dispute any errors: If you find any errors on your credit report, contact the credit reporting body and the lender or service provider that reported the information. They are obligated to investigate and correct any inaccuracies.
Keep records: Keep records of all your communications with the credit reporting body and the lender or service provider, including dates, names, and details of the dispute.
5. Closing Old Credit Accounts
Closing old credit accounts, especially those with a long history and a high credit limit, can sometimes negatively impact your credit score.
How it Impacts Your Credit Score
Closing old accounts can reduce your overall available credit, which can increase your credit utilisation ratio. It can also shorten your credit history, which is a factor in calculating your credit score.
How to Avoid It
Consider the impact: Before closing an old credit account, consider the potential impact on your credit score. If the account has a long history and a high credit limit, it may be better to keep it open, even if you don't use it regularly.
Use the account occasionally: If you decide to keep an old account open, use it occasionally to keep it active. Make a small purchase every few months and pay it off in full to maintain a positive payment history.
Prioritise closing newer accounts: If you need to close a credit account, prioritise closing newer accounts with shorter credit histories.
6. Ignoring Small Debts
Even small, seemingly insignificant debts can negatively impact your credit score if they go unpaid.
How it Impacts Your Credit Score
Unpaid debts, regardless of the amount, can be reported to credit reporting bodies and stay on your credit report for several years. These debts can significantly lower your credit score.
How to Avoid It
Pay all debts on time: Prioritise paying all your debts on time, even small ones. This includes bills for utilities, mobile phone plans, and other services.
Set up payment reminders: Set up payment reminders for all your bills to ensure you don't miss any due dates.
Address debts promptly: If you receive a notice about an unpaid debt, address it promptly. Contact the creditor to discuss payment options and avoid further negative consequences. For frequently asked questions about credit scores, visit our FAQ page.
By avoiding these common credit score mistakes, you can protect your credit rating and access better financial opportunities in the future. Remember to regularly check your credit report and take proactive steps to manage your credit responsibly.