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Empower Wealth Blog post by Empower Wealth

Three Simple Tips to Keep a Good Credit Rating

Gaining and maintaining good credit is one of the most important things a person can do for themselves. Credit is something that is often confusing to people who are looking to start building their credit and a daily necessity to those that have an established history. Following the Global Financial Crisis (GFC), Australia is now using a system whereby they put a rating on good credit conduct instead of the old system of just a bad credit conduct model. As this system develops, those that have excellent credit history and conduct could get better deals on interest rates and other credit than those who have average or poor credit ratings. Needless to say, having bad credit can not only put you into a spiral of debt that is hard to escape from, in this case, it will also limit your future opportunities.

To learn how to keep a good credit rating, you need to understand how it is calculated. According to Veda (www.veda.com.au, Feb 2015), credit ratings are determined by:

  • your default history, including overdue debts such as mortgage repayment defaults, or credit card payment defaults
  • the number of credit enquiries on file (made by lenders/credit providers)
  • the number of credit enquiries you have made in the past 12 months
  • your ‘credit shopping’ pattern; that is, how many lenders you have requested credit from.

Now that you know how it is calculated, here are three simple tips to keep a good credit rating.

 

  1. Don’t Be Quick to Open New Credit Lines or increase Credit Limits on Cards

The first of the three simple tips to keep a good credit score is a well-known one. Do not simply open new lines of credit just because it is easy to and instead, apply for credit only when you need to. This is something you should be cautious about because if a credit bureau or lender sees a flurry of applications for credit cards or personal loans in a short amount of time, they may construe that as a sign of fiscal irresponsibility or something is up.  Consequently, your credit rating will suffer.

While it is understandable to have multiple types of credit, trying to open multiple accounts all at once or constantly transferring credit card debt to new low interest offers, will eventually catch up with you. It is not the way to build good credit. Also, lenders will even look at things such as overdrafts, consumer leases, interest-free deals from stores, rent-to-buy loans or payday loans. Just beware that while some of these types of credit are quite easy to obtain if not managed well, you’ll often wind up paying more to the merchant involved due to high interest rates. This will not only reflect negatively on your credit history, it may very well prove to be confusing and too much to handle and cause you to miss payments or rack up extreme amounts of debt that you never intended to take on. It is definitely something that you should consider carefully.

The solution to this is to take on new credit one step at a time. If you start with a student credit card, for example, you want to make sure that you have been paying it down responsibly for some time before you branch out further. Next, if you need a car loan, you again want to make sure you establish good payment habits over time with that before you open any other accounts. The most important thing is to make sure that your accounts are all handled responsibly and you have been able to establish stability with each one before you take on something new. A good rule of thumb is to apply for a new credit lines only when strictly necessary.

 

  1. Pay Down Your Personal Credit Balances As Much As Possible 

Just because you are making your minimum payments on time doesn’t automatically mean you’ll get a great rating on your credit score. Having a lot of debt in relation to your available credit can cause your score to suffer.  One of the best ways to make sure you have enough money to pay down your balances is to draft a budget for yourself. When you put to paper your monthly income and expenses, it’s easy to see where you can make reductions in your spending and thus where you can save money. If you put a little extra money aside for paying down your balance, not only will you reduce your debt, but you can save money by avoiding costs from high interest rates. If you happen to come into a windfall of money for whatever reason, you may be tempted to celebrate by splashing out and treating yourself a bit, but if you buckle down and put it toward your outstanding balance, you’ll be glad you did further down the road. Always try to pay off debt from revolving credit as quickly as possible.

Similarly, if you have too many credit cards that you don’t use very often, perhaps it is best to close them. Apart from demonstrating a good credit habit it will also save you heaps on the annual membership fees and interest rates! If you do close out a card, do make sure that you haven’t run up a balance you haven’t paid off. Closing an account before it’s paid off can have dire consequences on your credit rating.

 

  1. Improve Your Payment Habits

It goes without saying that good money management habits will help with your credit ratings. You need to develop good payment habits across all your accounts or varieties of credit and one of the most common mistakes is utility bills. Many people underestimated the importance of paying your bills on time. Sometimes bills can be hidden away with the other pile of spams you received in the letter box or even if you have moved home before and had forgotten to set up the redirection, you probably didn’t even know you still have an outstanding bill. It’s understandable if you have late payments or missed payments in the past since everyone makes mistakes now and then but do not make it a habit. Although it may seem harmless but if you are more than 60 days overdue and you owe the utility companies $150 or more, they have the rights to report a default. A default will stay on your credit report for five years even when you have paid the overdue amount. So if you want to maintain a good credit rating, you must look toward the future and plan accordingly.

Now back to good money management skills, setting up monthly, or even weekly reminders will help you remember your deadlines. This can be difficult to stick to at first, but if you are adamant about improving and keeping your credit, it will pay off in the long run. You can also opt for SMS and email reminders. Many credit facilities and utility companies are starting to offer this option in order to help their customers manage their financials better. Some other ways to make sure your payments arrive on time is to pay online, via your phone or even set up a direct debit. With everything at your fingertip these days, there will be no more excuses for missing your repayments or bills.

 

Once You Have Good Credit

It’s difficult to get financing for a house or a new car without a positive credit history. Though credit cards have often been demonized, in the end it’s all about how you use them that determines your future. Following simple but sound credit practices such as keeping well organised credit lines and only opening new credit lines when it is responsible to do so , paying down your balance as much as possible and settling into regular payment habits will put you on the path to great credit score. Once you’ve established your good credit rating, all you’ll have to do is continue doing what you’ve been doing all along. By that point, the habits should be engrained. You may have access to more credit cards rewards such as cash back and frequent flyer points, and you’ll have more borrowing power from banks to put towards your investment, such as property. It takes commitment, but always remember the importance of having a good credit rating.

You can also book a one hour Free Financial Health Check with us. It’s a no-obligation appointment and we are more than happy to be able to assist you in your property journey. Simply fill in the form at the top right corner to get started. Alternatively, you can also join our Free Property Webinar to learn about investing in property and more!

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