Do you already have a credit card... or multiple? If you said yes, then read on. If you don’t have a credit card yet...then keep reading! We aren’t being biased because we’ve written it (okay, maybe we are just a little). Seriously though. What’s your number?
No, we aren’t talking about how many people you’ve slept with (keep that to yourself, yo). Nope, also not talking about what your favorite number is, or the number of purses or shoes you own. Wow, okay… so we’re definitely onto something. Numbers in general have a lot of 'judgy' power. For example our weight - it’s a number, the higher the worse, but too low, well that's still bad. Or the number of shoes or purses you own - high number, you may have a shopping addiction. Even your pant size is a number. See the pattern? If you’re number is too high with any of these things life or media tends to judge you. But guess what. Forget about what the media thinks. There’s one number we like being high though and that’s your credit score.
Credit Score 101
It’s one of those boring things that EVERYONE should learn about, but doesn’t, like filing taxes. Credit cards hold this unspoken power to either ruin your life, or enhance your life. There’s no in between of teasing. It’s either you’re good or you’re bad in the credit facilitator's eyes. So, what is it? Basically, it’s a number that’s based on credit activities you partake in and your ability to manage your debt. Essentially, it determines your creditworthiness to lenders.
First and foremost, not all credit scores are alike. Some countries will only document certain activities and be less comprehensive whereas, other countries literally want to know how many people you slept with (so, like everything.)
USA vs Australia
Point blank. Australia’s credit rating system has been extremely, well, nice. It pales in comparison to the amount of information gathered in determining a credit score that the US collects. Some could argue less comprehensive is worse if you make one bad decision (but not really.)
Australia’s credit rating system, Veda, was recently bought by US credit company, Equifax in 2016. It’s more and more likely that Australia will be on the move toward a US-style comprehensive credit scoring system.
What’s Included in your Credit Score?
Now that Australia has started adding to what’s included in your credit score, it aligns more closely with that of the comprehensive US credit reporting. Repayment history and credit limits, and account types held are now included. However, the US-style credit reporting includes the extra comprehensive bit of repayment history and credit usage (meaning how much of your limit you actually use).
How can you check your credit score?
If you're in Australia you can check out your credit score and credit summary here, for free. Once you know your credit score it'll be easier for you to understand what needs to be done or bring to your attention that you need to care more about your credit usage!
If you're in the US you can check your credit score here. Just note, you're entitled to a free credit report once every 12 months. You're allowed to request from each credit reporting agency: Equifax, Experian, and TransUnion.
Hardship of Credit Scores?
In Australia, credit doesn’t play as much of a hardship on you as it does in the US. However, there are still negative consequences if you act irresponsibly with your credit accountability. Lenders in the US use risk-based pricing which means the higher (better) your credit score the lower your interest rate. A score differing in just 20 points could be an interest rate change by a whole percentage. That’s massive in the scheme of money.
Australia is starting to take on risk-based pricing and is only used by peer-to-peer lenders according to finder.com.au. Some lenders within Australia though will choose to use your credit score for interest rate determination. So, a more comprehensive approach would actually allow for better decisions. You can read more about the changes in credit score system here.
Effects of Credit Scores
There’s obviously negative consequences to having a lower credit score. If you’re maxing out those credit cards and ignoring your bill, you are damaging your credit score. Some of the negative effects on credit scores are as followed:
- High interest rate on credit cards and loans
- Loan applications won’t be approved
- Difficulty getting approved for a rental lease
- Some might find it difficult to sign a phone contract
- Insurance premiums may be higher
- Face discrimination in car purchasing
- The ever annoying debt collector phone calls
If you practice responsible credit usage and debt management then the opposite for the negatives would be true. You may be gifted with lower interest rates, require less down payments, ease of obtaining leases, lower insurance premiums, and most importantly, you’ll feel good about yourself. You won’t feel that the world is judging you or that you can’t ever get ahead.
If you’re struggling with a lower credit score, we love this article from Bankrate outlining 7 ways you can improve your credit score. Have a read here.
If you’re still dying to tell us your number, leave it in the comments below. But really, we understand the wonders credit cards can do for you because it’s a catch 22. You’ll need to prove good credit worthiness to obtain the things in life you need, but in doing so you face the chance of damaging your credit worthiness even more. Smart credit consumerism is crucial.