How understanding your credit rating can help your financial health.

There comes a time in every woman’s life where she stops looking forward to spending her money on smashed avocado on toast weekends and starts looking towards bigger and better dreams. Whether yours is to move overseas, start your own business or buy your own home, all of our dreams have one big thing in common: we’re most likely going to have to access credit to make them happen.

Before you start looking at flights to NYC or running off to IKEA to deck out your someday-soon apartment, there’s one important factor you need to wrap your head around: your credit score.

To learn more about what exactly constitutes a credit history and how that can have an impact on my future, I spoke to Belinda Diprose, a representative of Veda, the largest credit reference agency in Australia and New Zealand and part of Equifax Inc. Belinda has been in the financial services industry for over 12 years and spent the past five helping consumers understand the importance of their credit report and credit score in taking control of their financial health.

Here’s what she had to say.

"All of our dreams have one big thing in common: we’re most likely going to have to access credit to make them happen." Image: iStock.

What is the difference between credit rating and a credit score? What are they used for?

Your credit rating and your credit score are essentially the same thing. Your credit score is a number between 0-1200 – 1200 being the highest possible score – which summarises your credit history and rates your “credit worthiness” – that is, to let lenders know how likely you are to make good on your repayment agreement.

Who can access your credit score?

Only you, Veda and those you have given permission to can access your credit score. Whenever you apply for credit, you agree to allow the lender to access your credit information including your credit report or score as part of the terms and conditions. This happens whenever you apply for a credit card or a loan, but also other forms of credit like mobile and internet plans, electricity and gas contracts and interest-free finance for furniture and appliances.

Veda conducts an annual “state of the nation” study that offers market-leading insights into the credit behaviours, attitudes and credit scores of Australians. The most recent study found that Australians on average enjoy healthy credit ratings, with the national average sitting at 757. This average is even higher when we look at women exclusively, sitting at 768.

23% of Aussies have also personally accessed their credit scores in the past year, suggesting that more people are taking control of their financial health.

What role does your credit report play?

The information on your credit report determines your credit score. Your credit report is a record of your credit history, including your activity in the past five years that relates to accessing and repaying credit. It keeps track of any applications that you’ve made for credit and any defaults on credit, as well as things like your repayment history.

"Only you, Veda and those you have given permission to can access your credit score." Image: iStock.

What benefit is there to knowing your credit score?

Knowing your credit score is a powerful tool in negotiating with lenders to help you get a better deal when you take out credit. When you think about car insurance for example, you get asked so many questions about how often you drive the car, who drives the car, where you park the car and so on because all of these factors affect how at risk you are to damaging your car, therefore impacting the deal offered to you.

Many types of credit, however, aren’t calculated in this way and there is a “one size fits all” blanket rate – such as personal loans, for example. In these situations, you actually could have a lot of bargaining power to negotiate a lower interest rate and your VedaScore is a powerful tool to help you. Not many people know about this or think to negotiate using their credit score, but it could actually save you a lot of money – thousands of dollars even – in the long run.

What kind of impact does a bad credit rating have on your life?

If you have a bad credit rating – or even a lack of credit history – it can obviously be quite difficult to take out credit. Your credit history is only particular to the country that you’re living in, so many new migrants or people who have lived overseas for an extended period of time have issues establishing their credit profile in Australia. This is because a lack of credit history makes it near impossible to take out phone, internet and utility contracts, let alone take out substantial loans or credit cards. While some items, like defaults, remain on your credit report for five years, good behaviour like paying your bills on time each month can help improve your credit profile.

"Not many people know that they can negotiate using their credit score." Image: iStock.

What practical tips can you give us to build a strong credit score?

My top tips for building a strong credit score are:

1. Make regular minimum repayments on time – this is seen as very good credit behaviour and you’re likely to be rewarded for it in your score.
2. Keep track of your credit commitments. Many people forget that they have a credit card if they don’t use it regularly and miss payments, for example, which can hinder your score.
3. Before you apply for credit, shop around for the best deals when taking out credit and be sure to do your research on what obligations you are committing to.
4. Speak to your lender if you are going through a bad financial patch. Sometimes people lose their jobs or have large unforeseen costs that can make repayments difficult. If you’re upfront with your lender about what’s going on, often they’ll help make better terms for you as it’s in their interest to help you with your repayments.
5. Monitor your credit rating over time. About a quarter of Australians are subject to identity theft and one way to keep on top of this is to monitor your credit report and score, as you can be alerted to irregular activity or something suspicious before your reputation is damaged.
6. If you’re moving house, be sure to notify your credit lenders as you don’t want to default because you never received a bill. In order to avoid this issue, go paperless.

How can you access your credit report and credit score?

Everyone can access their credit report and credit score using a quick and easy service that is available on the Veda website. This is a great comprehensive service that has helped empower many Australians to take control of their financial future.

What plans do you have for your future?