For anyone who has ever applied for a personal loan, it can sometimes come as a surprise to see your score sit above or below the ‘good’ credit score of 700+.
A surprise that can result in your loan application being denied.
But how is your application assessed and what can you do to ensure you gain your loan and even unlock better interest rates?
The Basics of Credit Scoring
Understanding how your credit score works is the key to unlocking not just any personal loan you apply for but gaining the best possible repayment rate available.
As financial institutions across Australia join the rapidly growing market, the value of your credit score is incredibly important. Whether it’s applying for a mortgage or a small personal loan, the ‘risk’ you represent to the lender is based on your credit score.
Australia’s three primary credit bureaus, Equifax, Experian and illion consider a credit score of 700+ and above to be the standard ‘good’ credit rating. They are the key tools available to help you understand your credit score. The further down you go, the less money you can borrow. Additionally, your interest rate and other repayment terms become constricted.
Depending on the credit bureau supplying the data, a credit report ranges from either 0 to 1,000 or 0 to 1,200.
To understand your credit score and where it might sit, it’s worth understanding that despite credit reports going as high as 1,200. The average credit rating sits at 695.6 for the average Australian between both men and women.
This is where we move on to the topic of comprehensive credit reporting and how it affects you.
How Comprehensive Credit Reporting Affects You
So, how is your credit score measured? And what influence, both positive and negative, affect your score?
Beyond previous criteria focussing on defaults, recent years has seen a refocus on average repayment behaviour. A concept known as comprehensive credit reporting (CCR).
CCR is a relatively new concept within Australia. Having only been introduced halfway through the 2010s, CCR was conceived with the notion that creditors and lenders needed a more reliable profile of each borrower.
Where once your credit report would have been negatively affected by a default on an outstanding amount or breach of contract, now even being late on a utility bill will have an adverse effect.
This is due to CCR requiring the banks to expand the information they must report to credit agencies. Allowing them to better illustrate everyone and their financial behaviour. Previous data points consisted of credit inquiries, defaults, and major infringements. Now, CCR now includes account open and close dates, types of credit, credit limits and financial hardship declarations.
Australian Banking Association, CEO, Anna Bligh.
When it comes to your personal loan application, CCR can have major influence on whether or not you will be approved.
Applying for several personal Loans or other forms of credit will reduce your rating every time. Especially if you have had a few late payments on your record.
Pre-approval and Preparing your Plans Without Negatively Affecting your Credit Score
This is when it becomes critical for you to understand your credit score and using pre-approval or ‘soft inquiries’ can help you.
One of the main misconceptions many Australians have surrounds credit inquiries, and how they can negatively affect the score average.
Applying for new credit or personal loan means the lender will check your credit score (Also known as a hard inquiry). However, logging onto a credit bureau to check your current score (a soft inquiry) will not hurt your credit.
Link through to these data bureaus to make your own soft inquiry on your credit score:
To allow new lenders the ability to explore the scope of lending they can access without requiring a hard inquiry. Lenders such as OurMoneyMarket allow soft inquires and provide pre-approval which avoids negative impacts on your credit score.
Credit Score-Based Lending Rates
In addition to pre-approval via soft inquiries, the use of CCR means lenders can extend their most competitive interest rates to borrowers who can illustrate an exceptional credit rating. And this is where the incentive for a good and above credit rating comes into play.
The higher your credit score sits, the less of a risk you present to the lender. Therefore, instead of paying high interest back in your repayments, you pay less and benefit more. In a nutshell, the month interest rate could range from around 5% down to 13% depending on the borrower’s credit rating. Differences of as much as 8% p.a.
OurMoneyMarket: Equipping You with the Knowledge You Need
With the combination of soft inquiry pre-approval and credit score-based incentives, OurMoneyMarket provides you with the insight you need to make a clear and considered decision.
With fixed interest rates from 5.45%p.a. (Comparison rate of 6.07%p.a.) for unsecured loans, you can easily access the loan you need that’s right for you.