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What makes up your credit score?

BY Rachel | 4 January, 2016 | no comments

One of the more exasperating aspects of moving through early adult life is being able to get a credit rating. No, let me rephrase that. For simple survival, you absolutely need to get a credit rating and have a credit score that elicits trust from lenders like banks and stores. When you are still at home and living with mum and dad, you never needed a credit rating because you dealt in cash, small cash too, and your parents bought you most of the things you needed.

Spend! Spend! Spend!

Once you have finished school and want to make your way in the world your desire for independence means:

  1. Buying a car.
  2. Buying new clothes.
  3. Buying a PC or laptop or iPad or Smartphone OR all of these items
  4. Renting an apartment. Maybe you want to buy your own place.
  5. Having a holiday overseas.
  6. Going out to dinner.

Did you notice the common thread in all the above items? Money! Yes, they all require money. Gone are the good old days when you could trade services for goods, or goods for goods, like wheat for animal meat. There were some great trades back a few hundred years. You could trade your way to owning a country with just some colourful beads and wine! That’s another story.

Starting Out with a Credit Purchase

I remember when I started out and I was working in the mining industry so my salary was quite good. I wanted to buy furniture for my rented house and because they were offering interest-free terms over 3 years I thought “Why not use their money instead of my cash?” The big problem was I had no credit rating. They had nothing to go by to see that I could pay a debt. The car I had was bought under my mum’s name and I used to pay her the monthly instalment. I had never thought of a credit card, never needed one. To make a long story short, I ended buying a lawnmower by putting down 50% and the store allowed me to get a loan through them for the other 50%. I waited 2 months and paid it off in full. That resulted in a lovely letter from the finance company stating I now had an ‘A Credit Rating’. And that was my start down the roller coaster ride of buying things on credit, paying them off, buying more, paying that off…you get the idea.

How is your Score Determined?

When you get into buying the ‘big ticket’ items like a home and a car, a strong credit score becomes important, unless you have won the lottery and can pay cash for everything. What exactly is that score all about?

Well, every time you buy something on credit, take out a loan, apply for a loan, make your payments on time, miss a payment, default on a loan or apply for bankruptcy, a record is kept. All stores, banks dealerships and loan companies report your financial transactions through a central agency. All that info about you is kept on a computer file. With Freedom of Information, you are able to get that file if you are so inclined.

What Makes up Your Score

35% Payment History – Do you make your payments on time? Do you pay items off before time? Have you missed any payments? Have you defaulted on a loan?

30% Balance Owed – How much money do you still owe on outstanding loans? This amount will go against your liabilities.

15% Credit History – Have you been a good citizen? How many loans have you had? Have you paid them all on time? Did you miss any payments? Did you get refused a loan?

10% Credit Mix – This means the types of accounts you have had. There is a different level of importance placed on say, a home loan compared to a loan for a laptop purchased at a computer store. Layby, small purchases, car, shopping, mortgage and credit cards show a ‘healthy’ mix of loan types. Nothing healthy about owing money but credit ratings are strange beasts.

10% New Credit Accounts – This speaks for itself. What are your most recent loan applications that you successfully applied for? Are you handling them all well? How many new loans do you have?

Living Normally

Having a healthy credit score means you are living like a good, normal person with lots of money owing, a good job that enables you to pay your debts and hopefully enough savings to have paid everything off before you die. In a money-based society like ours, your survival can depend on your ability to be able to borrow money. Big lottery winners are excluded from this lifestyle, good luck to them! The problem is that many people enter retirement and still have some debt. Or, they need cash but are too old to borrow. Some clever people have worked out a reverse mortgage scheme in these cases so that you can borrow money on the home you owe and which took you 30 years to pay off! It is a bit bizarre but money makes the world go around – not love.

Fixing that Score

It’s not a bad idea to get hold of your credit score and credit report to see just what information they have about you. Some companies provide advice and highlight areas that you can look at and make changes by paying more attention to that area of debt. If you’re failing to meet payments on the smaller debts because, at times, you simply forget and don’t have an automatic deduction set up, then consolidate your small debts and pay off that loan in larger amounts but sometimes at a lesser interest rate. There are lots of deals out there for money lending. Of course, the best way to deal with all this is to have no debts and pay cash for everything.

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