Your credit rating? What does it mean to you?

Lots of us live beyond our means with credit cards, loans, renting and phone plans.

So everyone should know what’s happening with their credit rating, right? Well you’ll find that’s not the case. People are blissfully ignorant, sometimes knowing there’s some issue but not confronting it.

Now’s the time to school up.

A credit rating is like your own personal history of credit. If you want more of a formal ‘dictionary like definition,’ a credit rating is an ongoing evaluation file of a person’s credit history, which illustrates the likelihood of that person’s ability to make repayments on future credit debts.

Credit reporting agencies gather information as soon as you start using credit with any credit provider. This information may include employment and personal information, a list of current and past credit accounts and their balances, your payment history and a history of past credit problems.

So if you have a credit file (whether it’s good or patchy) a loan provider will use this to help make their decision as to whether or not they will accept your loan application. To put this into a real life situation, when you apply for a mortgage at a bank they will contact a credit-reporting bureau and check your credit file. They do this to safe guard the monies they are lending to you and to help predict the likelihood of your repaying successfully.

If you have a bad credit file it can make it very hard to get credit or even a phone plan. But what do you have to do get a bad credit file.

Errors in your credit report
Unfortunately for all the credit consumers out there, it is possible for credit reports to have errors.
Creditors may have made an enquiry by accident. This can happen because someone else may have the same name or live at the same address, and the enquiry was listed against your name. Some credit providers will count enquiries against you when you apply for credit, so keep an eye on it. You can purchase your credit file at My Credit File for $29.95.

It’s also possible that you have an accidental default on there. Because a default will be on your credit file for 7 years, you should identify any erroneous defaults and have them removed immediately.

Late payments
One of the most obvious ways to obtain bad credit is by making late repayments on a debt, or skipping them altogether. Payment histories make up a reasonably large section of your credit file and there is no guide to demonstrate how loan providers should interpret it. In Australia they develop their own systems and scorecards. So make sure you keep on top of your payments to keep your credit file squeaky clean.

Identity theft
Identity theft is legally defined as the deliberate assumption of another person’s identity. Many people do not realise they have fallen victim to this crime until they apply for a large loan such as a mortgage.

With information like driver’s license numbers, account and other personal information, these heartless characters apply for mortgages and credit cards, buy cars, or withdraw savings. Some may even go as far as committing crimes under a false name. This is another reason you should keep track of your credit file.

Exceeding your credit limits
Like late payments, both reaching and exceeding your credit limits can negatively affect your credit file. This is sometimes referred to as ‘maxing-out’ your credit. As a credit consumer you need to take care not to exceed your limit, as exceeding it can make credit providers wary of your money management skills and turn down your application.

Declaring bankruptcy
While it is best to steer clear of bankruptcy, in some cases it can be the only option. Your financial situation can get beyond your control so badly that there is no way to recover. The last resort, bankruptcy may be the only solution available. Bankruptcy will remain on a credit file for up to seven years.

So keep an eye on your credit file, pay your bills and make sure your record is nice and clean so you can access credit when you need to.