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Understanding Credit: What is a Credit Score?

Exploring the importance of credit scores in your loan application

 When you first start researching personal loans, you’ll come across the phrase credit score or credit rating very quickly. It is a number that credit experts review when they are deciding on your loan terms. It may be one of several factors they consider, but it is quite a significant one. 

So, what exactly is a credit score, and how does this number impact your loan applications?

What is a credit score or credit rating?

A credit rating or credit score is a number that represents your financial trustworthiness, a unique picture of how you manage debts and repayments. It is based on your borrowing and repayment history and how well you’ve been able to meet and manage those obligations in the past. Credit scores can also be called credit ratings, and they also consider how often you’ve applied for credit. 

Handy Finance credit experts will review your credit score when they process your application before providing final loan terms. If you are preparing to apply for a loan, finding out your credit score can help you gauge what loan terms you may be offered. You can do this by requesting a credit report.

How is a credit score calculated? 

Credit reporting agencies are responsible for calculating credit scores. Generally, these agencies will consider these factors when assigning you a credit score: 

  • Your past and present debt, including your repayment history for any loans
  • Your ability to pay your bills on time
  • Any credit cards you have and your current credit limits, as well as any credit accounts you’ve closed
  • The number of loan enquiries you’ve made in the past, including those you’ve acted as guarantor for
  • Any bankruptcies, defaults or court judgments that currently sit in your name.

How do you check a credit rating?

Discover what your credit score is with a credit report. This details the factors used to calculate the final credit score through an approved credit check agency. These can be free, or you could pay a nominal fee, depending on who you choose to generate the report. You must confirm your name, date of birth, contact address and driver’s licence number to receive the report. 

In Australia, several agencies can provide you with an accurate credit report, including Equifax, Experian and Illion. 

There are two types of credit checks that are carried out – soft and hard checks. A soft check involves accessing your credit report directly – either through the accredited agencies mentioned earlier or an authorised third party – or when a loan provider seeks credit information for rate offer purposes only – not a loan application. They must indicate that this is a soft credit check. While this type of check may be noted on your file, a soft credit check will not affect your credit score. 

A hard check is when a loan provider requests access to your full credit report after you’ve applied for a loan. This is where the loan provider will review the credit report for your credit score, repayment history, and any other loan information to inform the final rate and terms they decide to offer you. This check is recorded on your credit report and may affect your credit score. 

This is how multiple credit applications can negatively impact your overall credit score, as each time a loan application is made, a hard check is completed. Checking your credit score through a reputable agency before applying for your loan is a safer way of determining your financial situation. 

Interpreting your credit score

Credit scores are divided into four simple categories: excellent, very good, average, and below average. Your credit score can change over time to move between these categories, depending on your financial behaviour. 

The higher the score (excellent, very good categories), the less risky it is for financial institutions to provide you with a personal loan. This is why those with a lower credit score can struggle to secure a personal loan. It’s not impossible, but approval won’t be instantaneous. 

How do you repair a credit score?

If your credit score is low, don’t despair. Your credit score is not fixed – it is only a picture at the time that any credit checks are run. Here are some simple ways you can improve it:

  • Paying bills or loan repayments on time is one of the easiest ways to repair your credit score. An extended period of payments made on time will make a difference in your score. It shows you’re reliable and can manage your finances effectively.
  • You can check your credit report – this allows you to see what potential lenders see when you apply for a loan. You can check for inconsistencies or incorrect information and have it removed from the report to update your score. 
  • Having a mix of credit – loans, cards, mortgages – can be good for your credit score. Lenders will see that you can effectively manage different types of credit.

Requesting a personalised quote

Once you know your credit score, you’ll better understand what your borrowing power for a personal loan might be. You can plug your credit score category into the Handy Finance Personal Loan calculator, along with several other prompts, and receive an estimate of your final repayments and interest rates for your personal loan. 

Another effective way to understand how your credit score will affect your interest rate is by getting a personalised quote. You can fill out the application at Handy Finance to request this quote. This will give you the information you need about your potential buying power. It is a more precise way of seeing your estimated loan terms. Requesting a quote doesn’t require a hard credit check that would leave an impact on your score.

Personal loans with Handy Finance

Now you’re clear on what a credit score is and how it can affect any loan applications, are you ready to learn more about personal loans from Handy Finance? Our personal loans can fund various purchases: a new car or caravan, home renovations, debt consolidation, medical expenses, tickets to your dream holiday destination and more. 

At Handy Finance, we offer personal loans from $2,001 to $75,000, with loan terms of one to seven years. Our interest rates are competitive and fixed, so your repayments will remain unchanged for the loan’s lifetime. You can repay your loan in fortnightly, weekly or monthly instalments.

Here are some of our personal loan offerings: 

  • Car loans
  • Home renovation loans
  • Debt consolidation loans
  • Caravan loans
  • Motorcycle loans
  • Boat loans
  • Green loans
  • Holiday or travel loans
  • Wedding loans
  • Medical and dental loans

We offer fair, flexible and fast finance at Handy Finance – we carefully review your loan application and offer you terms tailored to your financial situation. Start your online application today to kick-start your loan journey.