Before jumping into the 3 big mistakes you’re making that can impact your chances of obtaining a loan. I have a few questions.
Do you know what your credit score is?
If you don’t know what your credit score is it’s worthwhile finding out. You can do this for free via Credit Savvy, Credit Simple and Get Credit Score. Forewarning, by obtaining your credit score from these websites you can expect to receive emails offering you credit (not from us, as we don’t have any affiliation with them, but from our competitors).
So, what is a credit score?
In short, it is a number that represents your “creditworthiness” and provides an indication to lenders of the likelihood of something “bad” happening on your credit file in the next 12 months (e.g. bankruptcy, consumer and commercial defaults etc.). A diagram of Equifax’s credit scores and what they generally mean in terms of credit quality is below.
With Equifax (previously Veda) your score can range from -200 to 1200. The higher the score the better, for example, a score of 600 means there is a 5.88% chance that something “bad” will happen on your file in the next 12 months.
What do you think your score is?
I guessed mine would be at least around 750 (i.e. “Very Good”). I’ve never defaulted on any loan, I’ve never missed a payment, though as I’m relatively young I figured the “age” of my credit file might go against me (i.e. not much data to draw on). Well I was wrong. My credit score is 518 (i.e. “Average”) …Ouch! So how did this happen?
Well I made the same mistakes a lot of people make. Here are 3 common mistakes that impact your credit score and your ability to get a loan or the interest rate you deserve.
#1 Don’t Get Sucked into New Credit Card’s Unless You Really Need It
This was my downfall. Oh, the glory of 50,000 frequent flyer points for just signing up to a new credit card with ABC Bank – “I’ll just get a few of these bad boys and my dream holiday to Argentina will be sorted”. Sadly, each time you make a credit enquiry it impacts your credit score. Below is what happened to me the last time I opened up a new credit card:
• Credit Score Prior to Credit Card Enquiry = 554
• Credit Score After Credit Card Enquiry = 518
My score dropped 36 points! Suggesting that I was now 2% more likely to have a “bad” event occur on my credit file in the next 12 months.
Now I did this quite a few times over a couple of years (flights to Argentina are expensive and points aren’t worth what they used to be), and I know I’m not alone in doing so. It does seem unfair. My behaviour as a borrower didn’t change. I always honour my commitments. I didn’t even need the credit card. To the credit bureau’s however, the pattern of my enquiries suggested desperation and I was penalised for it.
So what do you do if you actually need a credit card or personal loan, but are worried about the enquiries impacting your credit score? Check whether the lender has a “pre-approval” process. For example, with OurMoneyMarket you can obtain a rate quote for a personal loan in minutes, without it impacting your credit score! We’ll also test whether you meet our eligibility criteria too so you’ll know if you have a good chance of getting a loan before you proceed.
#2 Avoid Payday Lenders If You Can
So not only do enquiries impact your credit score, but the type of enquiry also impacts it too. This is particularly the case when making an enquiry with a ‘Payday’ lender, but also applies for credit cards.
What is a payday lender?
A payday lender typically provides loans of up to $2,000 with repayment terms between 16 days to 1 year. They will often charge interest rates in excess of 45% (sometimes in the hundreds), promise you quick cash within an hour and from time to time can be seen in advertisements dressed as bunnies or wizards!
Sadly, we’ve seen some good borrowers badly impacted by payday loan enquiries, which prevented them from accessing credit 12-24 months later. Unfortunately, these borrowers had no idea the ‘Payday’ lender was considered “high-risk” by the credit bureaus. So, please check the terms and conditions before applying for a loan. If the interest rate is 45%+ or is for an amount less than $2,001, then there’s a good chance its considered ‘Payday’.
#3 Don’t Let Your Broker Run Wild
There are many people who have had great experiences with brokers, however sometimes it can go horribly wrong. Please keep a check on your broker and don’t let them “shop you around” to lenders, as all these enquiries will negatively impact your credit score and just make things worse.In the case of home loans, Mortgage Managers are hard to come by, but companies such as Mortgage Direct, make it their business of knowing the “in’s and out’s” of lender’s credit policies when it comes to home loans. They can be helpful in giving you an indication of whether your home loan will be approved without impacting your credit score.
Can I Fix My Credit Score?
Yes, you can. However, we’ll explore this in detail in a future article.
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