Opinion
Why is my credit score bad when I am so good with money?
Nicole Pedersen-McKinnon
Money contributorCan you please help me? I’m in shock. I consider myself really good with money and am just about to apply for my first home loan. I have my deposit finally and thought I was all ready to go. However, I have just discovered in one of those online searches that my credit score is bad – when I am so good with money. I guess not bad, but it’s only fair, so below good, very good and excellent (it was on Experian).
I have been trying to build my score over the past three years by applying for two credit cards a year. Mostly, I never carry over a balance on these cards, but I have done three 0 per cent balance transfers in the time, for holidays, and am totally on track to pay off each by the time the no-interest period ends. I have always paid my bills on time (I was in a share house last year and I believe my flatmate always sent our money on time too). I am desperate to fix this.
You can now access your credit score free of charge several times a year.Credit:
I can understand how disappointed and distressed you must be to come so far and then hit this – not insignificant – hurdle. Your first step to clearing it is to apply for your full credit report immediately.
Every Australian can now access this for free four times a year (more often if you’re having trouble with your score) from the three credit bureaus – besides Experian, there is Illion and Equifax.
Yes, some of our most private financial details are oddly held with three separate commercial companies, all of which have a separate credit-scoring system and even scale. In case there are hidden nasties on one report, get all three (it’s easy online).
Your “fair” Experian ranking means a credit score of between 550 and 624 out of 1000. That’s disturbingly close to the below-average ranking.
Now this may still get you approved by a mainstream, cheaper lender (but apply for any type of priced-on-prowess product like an online personal loan, and it would mean a higher interest rate). It also may not.
And from what you’ve told me, your even bigger problem might be that they won’t lend you anywhere near what you want. But I’ll come back to that.
I think it’s applications for credit that have killed your credit score – something that can happen even if you close your previous cards.
Each time you apply, it can suppress your score a little, and six times in three years can suppress it a lot. Another issue is that on three of these cards, the ones to which you have transferred a balance, your credit utilisation ratio is high.
In other words: you don’t clear your balance in full each month but “ongoing access” credit.
Instead of cards establishing you a score, they have created the impression you’re a bad credit risk – there are just too many applications (I advise no more than one a year) and too much debt (though you’re dealing with it smartly).
I am also worried about that flatmate situation. Might there have been a bill missed? You will need to pay it, then message the provider and all credit bureaus to note that on your file.
You could, of course, have mistakes on your file, too, which would depress your score, but at least they can be corrected in the above way.
So, what’s your bigger loan amount issue?
All your credit limits count in the calculation of what you can borrow – even the unused ones.
A lender will assume you need to cover repayments on your total credit card limits, sufficient to pay these off within three years. It’s a newish three-years-to-clear rule that often means mortgage borrowers have to cut down on, or actually cut up, their credit cards.
(Plus your three 0 per cent, limited-time balance-transfer deals mean there is a significant amount you really must repay or you will wear interest rates that go sky-high.)
The calculation of how much of your income that cards will rule out from what’s available to repay a home loan each month is: your total credit card limits x 0.038.
If you have $30,000 in credit card limits, that’s $1140 gone.
Whatever you do, don’t apply for the home loan until you have paid off some card debt, cut your limits and waited for your previous applications to have a lesser impact on your credit score. Sadly, this may take a year or so for other information to become more important in the calculation.
But a refusal for credit will do far more damage to your credit score than a perceived penchant for it.
Nicole Pedersen-McKinnon is author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, X and Instagram.
Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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