Why you should have a good credit rating.
How do you get a good credit rating and how do you know if you have one? Most people only find out when they apply for a loan or a credit card which may be too late, so what can you do to be prepared?
Firstly you need some form of credit, ie: credit card, personal loan, mortgage and the most important thing is you must pay this regularly/monthly. Don’t miss payments ever! Pay your bills, phone, water, electricity or gas on time.
Know your limitations, if you have a credit card, don’t have a $10,000 limit if you will spend $10,000 and struggle to pay it off. Like a packet of Tim Tams, if you open the packet, can you just eat one?
Be wary of purchasing items with the facility to pay for the items ‘after’ you receive them in ‘installments’. The temptation is there to do this more and more.
I have a Equifax login which gives me my credit score but also records any credit enquires made on my behalf and what limit my debt is. This also allows me to see if someone tries to take out personal loans or credit cards in my name which could affect my credit score. There are other factors which are ‘stability factors’ that affect your score, being how long you have been employed, lived at your current address, if you have changed your name etc.
With increasing fraud, you really want to limit your risk by not having a credit card linked to a savings account. Use the bank’s credit and if you have larger expenses, you could transfer funds into the card to pay for them. You may consider having the lowest limit available.
What happens if you don’t have a good credit rating or one at all?
Case Study 1: Couple renting, wife has taken time off work to raise children, so no regular income - no credit card in wife’s own name, uses one in partners name. Rent is in partners name as they claim a portion of the rent for their home office. Couple separate, wife has to find a job and juggle expenses while family law matters are sorted, applies for a credit card, but with no credit rating has to wait months to be approved and finds it difficult to rent, apply for a mobile phone on a contract, electricity, water or gas. In the meantime has to mange how?
Case Study 2: Couple who are retired in their mid 70’s decide to sell their home to downsize and free up some cash for retirement and to travel. Find the home of their dreams and make a offer which is accepted with settlement day for 30 days. Meanwhile their house is put on the market and promptly sold with a settlement of 60 days. Where does the money come from to pay for their new home while they wait the 30 days for their house to settle? They have some money in super but most is in a defined benefit so can’t be withdrawn. They have to apply for a bridging loan but they are the kind of people who pay cash for everything and don’t use credit cards. This makes it difficult to apply for the loan as they don’t use credit and don’t have a credit rating and they don’t receive approval for the bridging loan.
It’s important to be able to prove to the bank or lending institution that you will pay back your debt, are reliable and not a risk to them of defaulting. You may have a great credit score, but you also need to be able to prove that you have the savings/income to be able to pay back a loan, so it won’t qualify you for a $750,000 loan if you earn $75,000 a year and your cost of living is $70,000 a year, have a credit card with $8,000 of debt and minimal savings.
As a financial adviser I have to have a good credit rating as you would expect and no, there aren’t any packets of Tim Tams in my pantry.
General Advice Warning: The information in this post has been prepared for general information purposes only and does not take into account your personal objectives, financial situation or needs. It is not intended to provide commercial, financial, investment, accounting, tax or legal advice. You should, before you make any decision regarding any information, strategies, or products mentioned on this post, consult a professional financial advisor like myself to consider whether it is suitable and appropriate for you and your personal needs and circumstances