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Why is Your Credit Report so Important?

Posted on 25 Mar 2015 by Sophie Wakeham

Why is Your Credit Report so Important?

The importance of your credit report is not something to be underestimated, however it seems to be an area of confusion for many people. Either you don't know if you have one, are unsure of what it really means if you do, or know your credit score but need to work on improving it. I'm going to outline the basics of understanding your credit report, as well as a few tips that can keep your score high. Building a good credit report can be a lengthy process, so it's a good idea to get started as soon as you can.

What is a Credit Report?

Your credit report is a body of information relating to your history of handling money and debt. It contains a substantial amount of information including your job, past credit applications, how you pay your bills, if and how much debt you've accumulated, whether you've filed for bankruptcy, had a vehicle that's been repossessed or a home foreclosed. So, do you have a credit report yet? If you've applied for a credit card, a mobile phone plan or taken out a loan in the last five years, then it's likely that the answer is yes. Within your report there will be a numerical credit score which falls between -200 and +1,200. The number represents your relationship with credit, the higher the score the better it is.

Why is it Important?

Now, if this large pile of personal information sounds a little daunting don't worry. Your credit report is actually a very important and helpful tool that can be used to your advantage. It basically tells lenders if you are a risky or a good borrower. If you put work into ensuring that you have a good credit report, when you're ready to buy say, a new car or home, you'll be in a great position to qualify for the best interest rates. Everyone from lenders and credit providers, to car dealers, landlords, mobile phone companies and utility companies will use your credit report in determining if and how they can work with you.

How Does it Work?

When you apply for a loan credit providers or lenders will make enquiries to a CRB or Credit Reporting Body (you can also access your report from a CRB). The three biggest in Australia are Veda, D&B and Experian. From here lenders will determine whether you're suitable for a loan by assessing your credit report in terms of their own specific criteria. In some cases lenders will use your score to estimate/calculate the right amount of credit you'll need for something specific e.g. applying for a mortgage.

How to Create and Maintain a Good Credit Report.

First things first, a long credit history will help your score so if you haven't established a report already think about opening a credit card in your name. You can use the card sensibly only charging expenses you know you're able to pay off every month showing you handle bills and credit well. The longer your credit history, the more information there is for credit providers to look at when deciding whether you're a good credit risk.

Secondly, it's important to avoid getting close to your credit limit as scoring models will look into how much you spend out of the total credit available. Experts suggest that at the very maximum you should only use thirty percent of your total limit, it's key to avoid getting close to "maxing out" your card. It's also a good idea to get rid of unnecessary accounts; the more credit cards you have the more likely it is that you'll create debt.

Finally, and perhaps most importantly, a good credit report is reliant upon consistent bill payments. As a rule of thumb remember that all bills must be paid on time, every single time. Lowering your credit score through late payments can have a really negative effect on future plans to buy say, a new car or home. You can be in a great position having already made some solid savings, but fall late with your bill payments and the drop in your score could allow that fantastic deal with the best interest rates to slip through your fingers. The best way to avoid doing this is to use a personal finance tool that can allow you to set up a weekly/monthly bill budget. From here you can be sent reminders via email or SMS of upcoming bills, ensuring that you never fall behind with payments.

If you follow these tips, given time you can achieve a great credit report. To keep track it's a good idea to check your report a few times a year just to ensure its accuracy.

Sophie Wakeham

Sophie Wakeham

Content Wizard

Sophie is our content wizard. She is passionate about brand marketing, growth hacking and creating engaging and informative content.