Hi, my name is Adam Stewart, Debt Collection Expert and owner of ADC Legal Litigation Lawyers.
The metrics and algorithms that go into collating your credit score are changing rapidly, so it’s good to keep up to date on how they are changing and what you can do to preserve or improve your credit score. Firstly, a few things you need to know about how you are scored.
A credit score is a number, based on an analysis of a person’s credit file, to represent the creditworthiness of an individual. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits are applied.
Credit scoring models are statistical analysis used by credit agencies or bureaus to evaluate your worthiness to receive credit. The agencies select certain statistical characteristics found in a person’s credit payment patterns, analyse them and come up with a credit score.
Credit reporting agencies collect your financial and personal information and document it on your credit report. This information is then used to calculate your credit score, which includes:
- Your personal details such as your age, location
- The type of credit providers you have used like bank or utility company
- The amount of credit you have borrowed
- The number of credit applications and enquiries you have made
- Any unpaid or overdue loans or credit
- Any debt agreements or personal insolvency agreements relating to bankruptcy
What does my credit rating mean?
Depending on the credit reporting agency used to calculate your score, it will be a number between zero and 1,200 or zero and 1,000.
The number is rated on a five-point scale which are excellent, very good, good, average and below average. The position of your credit score on this scale helps lenders work out how risky it is for them to lend to you:
- Excellent – you are highly unlikely to have any adverse events harming your credit score in the next 12 months
- Very good – you are unlikely to have an adverse event in the next 12 months
- Good – you are less likely to experience an adverse event on your credit report in the next year
- Average – you are likely to experience an adverse event in the next year
- Below average – you are more likely to have an adverse event being listed on your credit report in the next year
You can get a free credit score from a number of online providers. The results may vary depending on which credit reporting agency is used. The following websites offer a free credit rating:
- Credit Savvy (Experian rating)
- Credit Simple (Dun and Bradstreet score)
- Finder (Equifax score)
- Get Credit Score (Equifax score)
You may need to check with more than one credit score provider to get a consistent and reliable measure of your credit rating.
Why is it important?
It’s not just banks that are interested in this information about you. Any company extending credit or assessing you for risk, will be interested in this data. Namely, insurance companies. According to the US, Insurance Information Institute, many insurers find credit-based insurance scoring to be important and statistically-valid in predicting how high a risk you are perceived to be in terms of the calculated probability that you will file a claim and the likely cost of that claim. Indeed, online retailers, may already be checking your credit-worthiness, before deciding on what you can buy on credit.
Online companies like Uber, Airbnb, Amazon and Apple, are all probably already assessing you for risk, although most people would be unaware of it. Whatever you do online is being logged, tracked and stored and you can be sure it will be used to rate and score you, no matter how insignificant you may feel the transaction may be.
Social scoring is also seen as an important indicator of a personal financial risk. Look at China’s Alipay app. Alipay is a payment platform, similar to PayPal, but with a built in social media platform that people opt into. Alipay is now assigning users a three-digit score that works as credit for everything in your life. It is known as Zhima Credit, it ranges between 350 and 950 and is meant to assess people’s worth. The company that runs Alipay, Ant Financial, says the credit scoring is credit system that covers the whole society. Zhima Credit is the embodiment of personal credit, reads the signup text. It uses big data to conduct an objective assessment. The higher the score, the better your credit. The Alipay bean counters realised that they could use the data-collecting powers of Alipay to calculate a credit score based on an individual’s activities.
My prediction is that this will come soon to countries like Australia and the US. Social media scoring companies, such as Klout, PeerIndex and Kred and already available. In fact financial companies who are assessing you for risk may already be using these social media metrics to assess your risk. Quite a lot of personal information is made freely available since most people tend to opt in to the social media sites and leave all their information open to the public.
A good social media score will get you a better credit score. In fact, one company is already making use of your social media information and on-selling it. The service is available through Trustbond, a joint venture between Suncorp and Spanish start-up Traity. This is a service where, instead of paying a full bond, the real estate agency will allow you to pay a reduced bond, so long as you sign up to Trustbond. In order to qualify, a customer must allow Trustbond to look through their Facebook, Twitter and other social media accounts to determine whether they can be trusted to care for the property. In return you pay a significantly reduced amount of bond. It’s a win-win scenario.
Now, finally, how to take action to preserve and improve your credit score:
- Start with knowing your credit score. Get your score from at least two different agencies.
- Shopping around for credit can actually reduce your score. The more applications you put in for credit cards, loans etc, may affect your score. Each time you apply for any form of credit, your prospective credit provider is likely to make an enquiry on your credit report. This is called a hard enquiry, as opposed to a soft enquiry where you request your own credit report. Hard enquiries take a few points off your credit rating, and lenders tend to view them negatively because having too many hard enquiries on your report suggests you’re desperate for credit and not managing your resources well. Try and be selective about who you approach and ask for credit.
- Watch what you post on social media. Companies are already incorporating social media as part of the overall assessment of your credit risk, so keep this in mind next time you post anything publicly.
- Pay off your debts, rather than moving them around and trying to consolidate all the time.
- Avoid negative accounts. Don’t let your loan repayments get behind or your accounts fall into the negative. Each time you default on a loan repayment or your account runs into the negative, it’s logged and noted, so don’t let it happen.
- Pay your bills on time. Sounds simple, but any company can list a default against you, so long as it’s a contracted debt, so don’t give them the chance in the first place.
- If you are in trouble, get help from a financial counsellor. There is a lot of great information at the Financial Counselling Australia website
ADC Legal Litigation Lawyers is a legal practice specialising in commercial advice and litigation, debt recovery and insurance claims recovery disputes. For more information, email us at email@example.com or call 1300 799 820. Talk to us about your litigation or dispute concerns via Skype at adclegal.