What’s the Deal with Credit Ratings?

When you hear someone mention the topic of credit ratings, you may feel like banging your head on the table rather than listen to such a dry subject.

But the truth is, credit ratings are fairly important when you are still young and don’t own anything of significant value like a house or car.

First let’s explain what a credit rating is:

A credit rating is a financial risk assessment that determines if you can obtain finance from any number of money lending agencies. It is an estimate of your ability to satisfy financial commitments based on your previous financial dealings.

Whether it’s a bank or you need financial assistance to get a new car, the business lending you the money can access your credit score.

A bank or lending agency will use your score to determine how good you are at paying back money and whether or not you are too risky for credit.

How to get a good credit rating

  • Pay back your credit card on time, avoid late fees

A good way to avoid late fees on your credit card is to set up a direct debit via your bank account so that the money is transferred each week, fortnight or month onto your card.

  • Pay bills on time

Even though this makes up only 35% of your credit rating, it is an easy way to boost it up. Set reminders on your phone or calendar to avoid overdue bill notices.

  • Regular savings

Putting a set amount away into a savings account each week shows that you can be responsible with your money.

  • Pay rent on time

Paying your rent on time is important, especially if you’re renting through an agent and not a private owner. Rental agencies record your payments and any late notices. This can be accessed by banks or other lending agencies when reviewing your credit rating.

  • Get paid into a bank account

Make sure you get paid into your bank account and not in cash. Some businesses get lazy and even though all the money is going through the books legitimately, some business will pay you in cash instead of having to go to the bank.

So insist that your pay gets transferred into your bank account. This will not only help with your credit rating, but will also help prevent you from spending your wads of cash so easily.

If you follow all of these steps, you’ll be doing yourself a huge favour, especially when you start looking at applying for home loans.

However, don’t despair if you have one or two overdue bills still stuck to your fridge. We all get forgetful and make mistakes from time to time, but don’t let them linger. Pay them off as soon as you possibly can.

According to Veda, “Under the Privacy Act 1988, an overdue debt can be listed on your consumer credit report when it is overdue by 60 days or more, when the debt is at least $150.”

So you have 60 days before it’s listed, but let’s go ahead and say you should definitely aim to have your bills paid by their due date.

You should also avoid applying for too much credit, as “a relatively high number of enquiries made in a short space of time” can hinder your ability to obtain credit, says Veda.

If you are having problems with paying your bills, credit cards, or even your mortgage on time, your lending provider or utility company may be able to help you. You can make payment plans if your bill is very high and can’t afford to pay it all in one lump sum, or you can have your due date changed so that you have more time.

These companies will want to work with you rather than against you, so never be afraid to tell them if you’re having trouble financially. The plans you make will not affect your credit rating, (assuming you haven’t left it too long) but you need to act quickly before they become an issue.