First things first: your credit score (or ‘rating’) is an aggregate of your entire credit history and is used by providers to determine your eligibility to take on debt.
You will have a personal credit score and, if you have been trading for a while, your business will have acquired a credit profile as well. It is important to note that some lenders will look at your personal credit score if you're setup as a sole trader or a partnership, as these business structures operate as an extension of you, rather than as a separate entity. This means that you are personally liable for repaying the debts of the business, and the lender will want to explore your personal capacity to do so before deciding whether to approve your application.
Sounds a bit scary, right?!
It can be, but the reality is that there are a few simple, proactive ways to stay on top of your credit score and this will drastically reduce stress further down the track!
What is a credit score?
Let's get back to basics.
In Australia, one of the largest providers is Equifax (formerly Veda). Equifax uses a scoring system between 0 and 1,200. If you score between 622 and 725, it's considered a “good” score. Between 726 and 823 you're looking at a “very good” score, and anything above that is considered “excellent.”
If your score is below 500, you may have a negative event listed on your credit score. This means that you may have missed repayments on existing credit contracts, or be unable to repay a current debt. If this is the case, it's best to seek help early. Speak to your credit provider and get a repayment plan in place. Map out how you're going to meet your obligations and stick to your plan.
It's also possible that an event has been mistakenly placed on your file, and you may be able to have this removed. This is much trickier and may require proof of the mistake, so be sure to speak to your accountant or trusted business adviser if you're looking to go down this path.
The 3 Key Players
There are three key parties that use and influence your credit score:
- You (the credit seeker);
- Credit providers (such as a bank or telco); and
- Credit reporting agencies (or bureau/body).
When you approach a provider for credit, they use a variety of means to assess your application. Typically, they will ask a credit reporting agency for your credit score.
This agency stores your credit history (known as a ‘credit file’) and determines your credit score based on: your repayment history, current loans/credit cards, pending credit applications and whether or not you have defaulted.
Your credit score may vary depending on which agency has been contacted, what details they have on file and how they prioritise your information to determine your score. Furthermore, the credit provider may have additional criteria that they use to assess applicants.
What if I have a low score?
Credit scores aren’t set in stone, so a low score isn’t the end of the world.
Your score will improve as you demonstrate good financial practices, ensure you pay your bills on time, avoid late payments and minimise the amount of credit applications you make.
You may be surprised to hear that where you borrow money from is also relevant to your score. If you're borrowing from a bank or credit union, it's considered to be lower risk than if you were to borrow from a non-traditional lender. Unsurprisingly, the amount you're requesting and the number of times that you apply also has an impact on your score. This is because it gives the credit provider a sense of whether you're 'shopping around' for credit. If you default on credit repayments, these may be listed on your credit file.
Just remember: a low score isn't for life.
If you start demonstrating good financial management, and show a strong track record of meeting repayments and managing debt responsibly, you'll be well on your way to turning your score around.
For more information on managing your finances, visit the Money Smart website.
What about credit scores for businesses?
Businesses also have a credit score which is used to determine eligibility for credit. Credit providers will consider the size of your business, the industry you're in, any public records (e.g. bankruptcy), previous loan applications and trading history. Depending on the structure of your business, providers and agencies may also take into account your personal credit score (as mentioned earlier). For example, if your personal and business finances are intertwined - which can happen when you're running your own business - it may be the case that credit providers will make an assessment based on an aggregate of the two credit positions.
Who can access my credit file?
Your credit score is only available to approved credit providers under the Privacy Act (1988), which include banks, telecommunication providers, utility companies and building societies. If you want more information about your rights and where your information can and can't be shared, the Office of the Australian Information Commissioner publishes this on their website.
I want to know my credit score.
It's surprisingly easy and there are a few ways you can do it. Start by trying Get Credit Score or creditSavvy.
You will need to provide a few details in order to get started: full name, date of birth, residential address and drivers licence number. It is rare for credit reporting agencies to require your credit card details, so keep an eye out for scams.
Once you've got your score, you're going to want your 'report card'. This is a breakdown of the factors contributing to your score. You'll want to understand how and why certain things are having an impact, and whether there are any problem areas you need to address.
Be sure to double-check all of the details in your report are correct, as mistakes can alter your score. Contact the creditor to amend any incorrect details and if you are unsatisfied with their response, refer your case to the Credit & Investments Ombudsman.
As mentioned earlier, this can be a tricky process so be sure to involve a trusted business advisor. In some cases, your advisor may have experience in this area and may be able to liaise with the provider to get the issue sorted out. If this sounds like you, it might be worth chatting to one of Valiant's credit specialists. You can do this by giving us a call on 1300 780 568.
The bottom line is that practicing good financial habits and ensuring your details are up-to-date will help keep your score where it should be. Your credit score is important whether you're looking to obtain finance in the short-term or not.
Please remember: this article does not constitute financial advice, and any advise that is offered is general in nature. Please consult your accountant, lawyer or trusted business advisor before taking action. Valiant's experienced team of credit specialists may be able to help, and you can contact the team by calling 1300 780 568.
Alex is the co-founder and CEO of Valiant Finance. He brings a wealth of experience from his time as a banking consultant at McKinsey, and has a background in Business and Law.