What do lenders mean by a good credit score?

 

Acess your borrowing capacityWhen you first embark on home ownership or property investment you often come across a variety of unfamiliar terms.

There are loan-to-value ratios, unconditional contracts and credit scores to learn about.

In this article, however, we’re going to focus on what is a good credit score in Australia, because many people don’t consider this prior to it becoming an important factor in their future property dreams.

We’ll outline what a VedaScore is and why it matters to your financial future, what is considered to be a good credit score, how it’s calculated and how you can make it better.

So, what is VedaScore?

Paid and Unpaid

When you first apply for a home or property investment loan, or a personal loan, there are a large number of financial checks and balances that will be assessed by your lender of choice.

Of course, using a qualified and professional mortgage broker, will ensure that you have the best chance of having your finance application approved but it’s also important to understand how that approval process works.

First up, Australian lenders generally use your VedaScore as one of the ways that they calculate what your credit score is.

A VedaScore is calculated by Veda, which is Australia’s largest credit bureau. Your score helps lenders assess your credit application when you apply for a loan or line of credit. Similar to a tool that ranks your risk, all credit information is used to predict the outcome of your loan within the next 12 months.

It’s equally important to recognise that in addition to your VedaScore, lenders will apply their own lending criteria. That’s why you shouldn’t completely rely on your VedaScore as an indicator of whether you can apply for the credit or not.

Most people don’t understand that the way that operate financially could ultimately impact their credit score. That is, if you regularly miss your credit card payments or are always overdue paying your monthly phone bills, then this can have a negative impact on your credit score.

 

What is considered a good credit score?

One of the benefits of understanding your credit score is that there are specific guidelines about what constitutes a good score.

Credit score document vector concept, banker hand holding paper sheet chart of personal credit score information, person data report form, good index of credit history and approved stamp isolated It’s fairly straight forward that the higher your credit score the better, because your credit score affects your access to better loan and credit card deals.
While your VedaScore is but one facility that lenders use to assess your finance application, they do provide succinct information about the various score levels and what your credit score means.

Your VedaScore is displayed as a number and indicates the likelihood of an “adverse event” being recorded on your credit file in the next 12 months.

An adverse event can be a range of “bad credit” listings such as a default, a bankruptcy or a court judgment.

So, with this in mind, the higher your VedaScore, the less likely it is that an adverse event will be recorded on your file and the less of a risk you will appear to lenders. The lower your credit score, conversely, the riskier you will appear as a borrower.

  • Below average to average (0-509)It’s more likely an adverse event will be recorded on your file in the next 12 months. You are in the bottom 20 per cent of Veda’s credit-active population.
  • Average (510-621) This score suggests that it’s likely that you will incur an adverse event in the next 12 months. Your score places you in the bottom 21 to 40 per cent of the credit-active population.
  • Good (622-725) Adverse events are less likely to be recorded for the next 12 months. You fall in the mid-range (41 to 60 per cent) of Veda’s credit-active population.
  • Very good (726-832) Unfavourable events are unlikely to be recorded onto your credit file within the next 12 months. Your score places you in the second-highest percentile range of the credit-active population (61 to 80 per cent).
  • Excellent (833-1200) Adverse events are highly unlikely to happen within the next 12 months when compared to the average Australian. The odds of no adverse events occurring on your credit file in the next 12 months are five times better than the population average and you are in the top percentile range (81 to 100 per cent).

 

OK, I understand, but how are credit scores actually calculated?

Photo of a man going through his financials problems

The thing about credit scores is that they’re not calculated by someone sitting there will be a calculator or an abacus assessing your latest bank statement or credit card transactions!

The wonders of modern technology means that credit scores are calculated by an algorithm that uses information from your credit file.

What this means is that your credit score is generated by looking at patterns in your credit history, characteristics of your credit profile, and aspects of your credit applications.

There are a number of variables that are considered during the calculation of your credit score. These can include:

  • One of the biggest impacts on your credit score can be numerous applications to different credit providers within a short period, so if you’re “shopping around” for credit. This will increase the number of credit enquiries on your credit file and is less favourable than having infrequent and fewer credit enquiries.
  • The spread of credit enquiries over time can influence your credit score. Older credit enquiries have a different level of risk associated with them than more recent credit enquiries. That’s why it’s so important to keep your credit enquiries to an absolute minimum.
  • Of course, negative information such as defaults, serious credit infringements, bankruptcies, and court judgements are high risk indicators and can also adversely impact your credit score.
  • There are a number of other potential risks, which are derived from your personal details, which can include your age, length of employment as well as length of time at your current address. Credit assessors generally like to see stability of employment and in your living situation, which both can improve your credit score.
  • The age of your credit history can also impact your credit score, so a credit file with a longer credit history will have a different level of risk than a newer file with a limited credit history.
  • As we’ve discussed before, it can be more difficult for business owners to have credit applications approved. When calculating your credit score as a business owner, variables such as the location of your business, the length of time your business has operated at its current address, and the credit history information contained in the commercial section of your report may be considered.

 

What can I do to make my credit score better?

Close-up picture of an invoice with red paid stamp with selective focus. Great use for financial concepts.While it might seem that your financial health is assessed behind closed doors and you can’t do anything about the result, there are a number of ways that you can improve your credit score.
The number one thing that you can do to make your credit scores better is one of the most simple – seemingly.

Whether you’re in the market for credit or not, you should always pay your bills on time! No excuses! This includes credit cards or loan repayments. We know it can be tricky to keep up with these, but online banking these days makes it much easier to never miss a bill payment by setting up reminders or scheduled payments. That way you should never miss a payment – even if you’re on holiday at the time!

We always recommend paying off credit card balances in full in every month, but when it comes to your credit score it’s not the balance that’s the most important, it’s the credit card limit.

So, as well as paying off the balance monthly, consider lowering the limit from, say, $15,000 to $5,000 because it will be the limit that will be used in your credit score calculation rather than the balance.

Of course, this is even more critical if you have more than one credit card because all of the limits across the cards will be included in the calculation of your credit score.

In fact, it’s a better policy to axe any credit cards that you don’t use or are just there for a “rainy day” because that will likely have a favourable impact on your credit score.

Also if don’t have a credit card (which isn’t necessarily a bad thing) you should consider getting one – as long as you can pay off the balance every month. You see, the thing is, your credit score is partly assessed on your ability to manage debt such as a credit card or a personal loan, so it’s important that you can show that you’re responsible and can pay off debt promptly.

 

Intuitive Finance – the smart choice

Complementary finance strategy sessionAs you can now see, there’s more to being approved for a personal loan or a home loan than just filling out some paperwork and blindly hoping for the best.

Your ability to consistently manage credit and repay debt is but one of the ways that can influence how your credit score is calculated.

The world of banking and finance can be a pretty daunting one for both novice and sophisticated investors and since our establishment in 2002 we’ve focused on providing outstanding service and business standards.

This approach was vindicated when we were recently named Victoria’s favourite mortgage broker at the 2015 Investors Choice Awards.

Understanding what constitutes a good credit score as well as the ways that you can improve your score is vitally important in today’s financial world.  So why now contact Intuitive Finance today to ensure you have the right information and expert support on your side no matter what stage of the property ownership journey you are on?

Discuss your specific needs & formulate the right strategy for you. Get in touch to organise your complimentary 60min session today!

Andrew Mirams

Andrew Mirams

Andrew Mirams is the Managing Director of Intuitive Finance and is a highly qualified mortgage advisor who holds dual diplomas in Financial Planning (Financial Services) and Banking and Finance (Mortgage Broking). Andrew’s expertise covers all aspects of lending for a diverse range of applications – from first home buyer loans or property upgrader loans, property investor loans, expatriates and loans for self-employed. With almost 30 years of experience, Andrew has been acknowledged by the mortgage industry as one of its best performers with multiple awards including regularly featuring in both the top 100 mortgage brokers list and Top 50 Elite business writers. Andrew was voted Victoria's favourite Mortgage Broker at the 2015 Investors Choice Awards, and won again for the same category at the 2017 Better Business Awards. The team at Intuitive Finance has also figured prominently by winning the 2016 "Best Independent Office (<5 brokers)" and "Best customer Service" Awards, and more recently at the 2017 MFAA National Awards, they also took out the "Best Customer Service" Award, a recognition which speaks for itself! Visit Intuitive Finance for more information.
Andrew Mirams

Leave a Reply

Your email address will not be published. Required fields are marked *