Published in July 30, 2024
Maintaining a good credit score is essential for securing favourable loan and credit card terms, as it reflects your financial reliability to potential lenders. Understanding the nuances of the credit system can help you navigate the borrowing process more effectively.
This guide provides specific tips on shopping for loans and credit cards while safeguarding your credit score, ensuring you make informed financial decisions without inadvertently harming your creditworthiness.
A credit score is a numerical representation of your creditworthiness, used by lenders to assess the risk of lending you money. In Australia, credit scores typically range from 0 to 1200, with higher scores indicating lower risk to lenders.
Read more about credit scores in our previously published articles:
Several factors impact your credit score:
Lenders use your credit score to evaluate the likelihood that you will repay your debts. A higher score can make you a more attractive candidate for loans and credit cards, as it indicates lower credit risk. This can affect not only whether you are approved for credit but also the terms of the credit offered.
Lenders typically look for a credit score of at least 600 for car loans, although some may consider scores as low as 550. For other types of loans and credit cards, a higher score increases your chances of approval and may provide access to better rates and terms.
Your credit score also influences the interest rates and terms of your loans and credit cards. Higher scores generally lead to lower interest rates and more favourable loan conditions, saving you money over the life of the loan. Conversely, a lower score can result in higher interest rates and less favourable terms.
Credit enquiries, or credit checks, are divided into two main types: hard enquiries and soft enquiries. Each type has different implications for your credit score.
Hard enquiries occur when a financial institution, such as a bank or lender, checks your credit report as part of their decision-making process for a loan or credit card application. These enquiries require your permission and stay on your credit report for up to five years in Australia.
Soft enquiries, on the other hand, are checks that do not impact your credit score. They can happen without your explicit consent, such as when you check your own credit score or when a company checks your credit for a pre-approved offer.
In the short term, hard enquiries can cause a small drop in your credit score, but this impact usually diminishes over time. However, having multiple hard enquiries within a short span can have a cumulative negative effect, potentially affecting your ability to secure credit on favourable terms. In the long term, as these enquiries age and new positive credit behaviours are reported, their impact lessens.
To minimise the negative impact of hard enquiries, it’s advisable to limit the number of credit applications you make. If you need to apply for multiple credit products, try to spread them out over time rather than applying for several at once. Regularly checking your own credit score is a good practice and doesn’t harm your credit score since it counts as a soft enquiry.
Researching before applying for loans or credit cards is crucial. It helps you find the best deals, avoid unnecessary fees, and understand the terms and conditions of your financial products. This preparation can save you money and protect your credit score from unnecessary hard enquiries.
When comparing loans and credit cards, consider the following features and benefits:
Here are some trustworthy comparison sites to start your research:
Pre-approval is a preliminary evaluation by a lender to determine how much you are eligible to borrow before you formally apply for a loan. It involves a basic assessment of your financial situation, including income, expenses, and credit history. The process typically requires you to submit some financial documents, such as payslips and bank statements, and the lender will provide an estimate of the loan amount you can qualify for.
To obtain pre-approval without negatively impacting your credit score, consider the following tips:
Conditional approval is similar to pre-approval but often involves a more thorough assessment. It is usually sought after finding a property and includes specific conditions that must be met for final approval. To approach lenders for conditional approval:
Pre-approval can impact your credit enquiries in the following ways:
Timing your applications for loans and credit cards is crucial for maintaining a healthy credit score and securing favourable terms. Here are some specific strategies:
Applying for multiple loans or credit cards in a short period can negatively impact your credit score due to multiple hard enquiries. Aim to space out your applications by at least six months. This gives your credit score time to recover and demonstrates financial responsibility to lenders.
Align your credit applications with significant life events and financial needs. For instance, if you’re planning to buy a home or car, it’s wise to avoid applying for other forms of credit in the months leading up to your major purchase. This approach ensures you maintain a strong credit profile when you need it most.
Be selective about the credit you apply for. Only apply for loans or credit cards that genuinely meet your needs and offer favourable terms. Research thoroughly and choose products that align with your financial goals, rather than applying indiscriminately.
Quality over quantity is a key principle. Instead of applying for several credit cards with mediocre benefits, focus on obtaining one or two high-quality cards that offer substantial rewards, lower interest rates, and favourable terms. This approach helps in managing credit responsibly and avoiding debt traps.
Avoid applying for credit on a whim or without a clear purpose. Each application impacts your credit score, so ensure you have a valid reason before proceeding. Use online tools and resources to compare different credit options and make informed decisions.
Soft enquiries, or soft pulls, are credit checks that do not affect your credit score. They are conducted for informational purposes, such as when you check your own credit or when lenders pre-qualify you for offers. Here’s how you can use them to your advantage:
Regularly checking your credit score allows you to stay informed about your financial health without impacting your score.
Did You Know 💡You can monitor your credit score for FREE through Tippla? Aside from this, our platform also gives you the opportunity to manage your finances seamlessly.
Take advantage of pre-qualification offers from lenders, which use soft enquiries. These offers give you an idea of what loans or credit cards you might qualify for without a hard enquiry impacting your credit score. Websites like Finder and Canstar allow you to compare pre-qualified offers from various financial institutions.
Utilise resources that offer soft enquiry checks to make informed financial decisions. Tools like Tippla and My Credit File from Equifax let you access your credit score and history, helping you understand your creditworthiness.
Credit monitoring services such as Experian and Equifax provide ongoing access to your credit information, helping you spot potential issues early. These services can alert you to any changes or new credit enquiries on your report, enabling you to address them promptly. Additionally, services like Tippla offer a similar function, providing notifications about updates to your credit report and helping you manage and protect your credit profile effectively.
Many financial institutions, including major banks like Commonwealth Bank and ANZ, offer soft enquiry checks for pre-qualification purposes. Using these checks, you can explore loan and credit card options without impacting your credit score.
One of the most crucial steps in building a strong credit profile is paying all your bills and debts on time. Whether it’s your electricity bill, phone plan, or credit card, timely payments demonstrate reliability to lenders. Setting up automatic payments ensures you never miss a due date.
Credit utilisation refers to the percentage of your available credit that you are using. It’s advisable to keep this ratio below 30% to show that you manage your credit responsibly. For instance, if you have a credit limit of $10,000, try to keep your balance under $3,000.
Regular checks on your credit report can help you stay informed about your financial standing and catch any discrepancies early. This practice also allows you to track your progress over time and understand how your financial behaviour affects your credit score.
You can obtain a free credit report once a year from major credit reporting agencies like Equifax, Experian, and illion. You can request these reports online through their websites. Keeping an eye on your credit report can help you spot any inaccuracies or fraudulent activities.
If you find errors on your credit report, it’s essential to dispute them promptly. You can contact the credit reporting agency and the entity that provided the incorrect information. Provide any necessary documentation to support your claim and request a correction. Resolving these issues can improve your credit score and ensure your report accurately reflects your financial behaviour.
If you’re facing financial difficulties, making significant financial decisions, or need help managing your money, it may be time to consult a financial advisor or credit counsellor. Situations like planning for retirement, buying a home, or dealing with debt are common reasons to seek professional advice.
Professional advisors and counsellors can provide tailored advice to help you achieve your financial goals, create budgets, manage debt, and make informed decisions. They offer an objective perspective, which can be invaluable when navigating complex financial situations.
It’s important to find a licensed and reputable advisor. The Australian Securities and Investments Commission (ASIC) maintains a register of licensed financial advisors. Check this register to ensure the advisor you choose is properly licensed and has a good track record.
Government and non-profit organisations offer free or low-cost financial counselling services. Financial Counselling Australia (FCA) is a key resource, providing access to qualified professionals who can help you manage financial difficulties. Their services are confidential and non-judgmental.
ASIC is the regulatory body overseeing financial advisors in Australia. They provide valuable resources to help you understand your rights and responsibilities when receiving financial advice. Their website offers tools to verify the credentials of financial advisors and information on what to expect from professional advice.
FCA is a national body representing financial counsellors. They offer resources to find qualified financial counsellors who can provide free, independent advice. Their website is a great starting point to understand your options and get the support you need.
Managing your finances effectively involves understanding when to seek professional advice, the benefits of doing so, and utilising reputable resources such as ASIC and Financial Counselling Australia. Professional advisors and counsellors offer tailored guidance to help you achieve financial stability and make informed decisions.
By leveraging these resources, you can ensure that your financial strategies are sound and tailored to your specific needs, ultimately leading to better financial health and security.
While we at Tippla will always do our best to provide you with the information you need to financially thrive, it’s important to note that we’re not debt counsellors, nor do we provide financial advice. Be sure to speak to your financial services professional before making any decisions.
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