Your credit score can be important for getting approval for any type of loan or credit, including business finance. This article explains everything you need to know about credit scores, including simple steps you can take to improve your score.
What is a Credit Score?
Your credit score is a number that gives a lender an idea of the risk of lending you money.
A credit score is sometimes called a credit rating.
Both terms mean the same thing.
Mainstream lenders check your credit score when you apply for a loan or any form of credit.
Credit scores are compiled by credit reporting agencies in Australia.
The main agencies are Equifax, Experian and Illlion.
You also have a legal right to check your credit score for free at least once a year.
You should always check your credit score before you apply for finance.
Your credit score will range between 0 and 1200. The higher the score the better.
If you have a good history of repaying all your debts on time, you’ll have a good credit score.
- You’ll then find it easier to get approval to borrow money.
- You’ll be able to borrow at lower interest rates.
- Your borrowing power will be higher.
Any score lower than 600 is usually regarded as a bad credit score.
- You’ll then find it’s more likely that your loan or credit application is declined.
- Even if it is approved, the application process will usually take much longer.
- Your borrowing power will also be lower than if you had a good credit score.
- You’ll be charged a higher interest rate to compensate the lender for the higher risk of lending you money.
It’s important to understand that mainstream lenders are risk-averse.
What Lowers Your Credit Score?
- Not making your debt or credit repayments on time.
It’s important to understand that debt and credit includes things like mobile phone, electricity and gas accounts, as well as loans and credit cards.
If you have a bill of over $150 that’s more than 60 days overdue, this will be recorded with credit reporting agencies.
Each overdue bill will lower your credit score and stay on your credit file for two years.
- Not making your debt or credit repayments at all (which is known as ‘defaulting’).
Defaulting on any of your debts will make it extremely difficult for you to borrow in the future, especially with mainstream lenders like banks.
Defaulting can also lead to you being declared bankrupt or being sued to recover the debt.
If you’re declared bankrupt, you won’t be able to legally borrow for at least three years until you’re bankruptcy is discharged.
Your bankruptcy or other debt recovery proceedings will be recorded on your credit file for up to 7 years. This will be a major ‘red flag’ for lenders.
- Making too many loan applications in a short period.
Every time an application is declined, it lowers your credit score.
You should therefore avoid making multiple applications to different lenders for the same financial need.
If you are applying to multiple lenders in the hope of getting a single approval, it looks like you’re desperate.
It won’t give a lender confidence in your ability to make your repayments.
- ‘Maxing’ out your credit card or increasing your credit limit.
This reduces your borrowing power.
It also indicates to a lender that you’re having trouble managing your money.
Credit cards have high interest rates and should only be used for short-term debt.
- Your partner’s credit history if you have any joint accounts and your partner has any repayment issues..
What Improves Your Credit Score?
- Catching up on any overdue repayments (if you have any).
This will make it easier to keep your debt level under control.
- Making all your current and future repayments on time.
This shows lenders that you’re a trustworthy borrower.
Set up direct debits from your account to make sure you don’t forget or miss scheduled repayments.
Australia has recently moved to comprehensive credit reporting, which means that details of on-time repayments are now included in your credit file.
- Don’t make too many loan applications in a short period.
The fewer times you’re rejected, the less your credit score is affected.
Only apply to a single lender when you’re confident you’ll get approval.
Check your credit score and take simple steps to improve it if necessary before you apply.
You should also check that it’s accurate. If it contains any incorrect information, you have the right to have it quickly corrected by the reporting agency. This will immediately improve your score.
Checking your credit score doesn’t affect it, unlike making loan applications does.
Check it every few months if you’re taking steps to improve your score so you can see your progress.
- Maintain a significant unused credit card limit.
This shows lenders that you’re a good money manager and that you have a financial safety buffer if necessary.
- Consolidate your debts
This involves combining all your debt into one loan. Ideally, you should combine high-interest debt (like credit cards or personal loans) into lower-interest debt like a mortgage.
Doing this will make your repayments easier to manage. Instead of having to manage multiple regular repayments, a single regular repayment can cover all your debts.
What if I have bad credit but need a business loan right now?
At DFS, we are private lending specialists. We have:
- a network of over 200 private lenders.
- no credit checks if you have property you can offer as security.
- a simple online application process
- fast approvals.
