Credit plays a huge role in our lives. According to our COVID-19 Credit Check-up research , 76% of Aussies currently have some form of credit product, whether it be credit cards, home loans, car loans, or Buy Now Pay Later products.
Since the start of the pandemic, consumers have received a wealth of information about credit and finances, and we know that they have been listening and making changes to improve their financial situation.
The same research revealed that three quarters of us have admitted to changing our spending, savings, and credit habits as a result of the pandemic. More consumers are budgeting, repaying debt, and deferring significant purchases. We are also seeing consumers shopping around more, comparing prices, and reviewing their budgets.
Australians seem to be emerging from the pandemic more informed and aware of their behaviour than before. It is important for everyone to understand how adopting good financial habits can help to manage the impact of a crisis and help to prepare for big-ticket purchases in the future.
The Australian credit reporting system changed with lenders now reporting comprehensive credit reporting about their customers’ credit account payment habits, which is reflected in your credit report.
Below we look at some ways that Australians can help themselves by going back to basics and getting their credit health in shape.
How to keep your credit healthy in 5 steps
1. Know what’s in your credit report
Your credit report includes comprehensive credit information on the type of accounts you hold, up to 24 months of your repayment history, how many times you’ve applied for credit, and how much debt you have available.
When we say credit accounts that reflect your repayment history information, these include credit cards, home loans, personal loans, and vehicle loans.
There are credit accounts that do not reflect your repayment history information – these include telco and utilities companies and, currently, Buy Now Pay Later (BNPL) products.
Remember - if you are late making repayments to credit cards, home, personal or vehicle loans because you made a payment towards the pair of shoes you purchased using BNPL products, then the missed repayment will be noted in your credit file, not the repayments you made on the BNPL product.
Getting to know what’s in your credit report is the first step in taking control of it.
2. Check your credit report
When you apply for credit or a loan, a lender will look at your credit report to understand your debt commitments and gain insights into your credit health. You are able to check your credit report for FREE, every year, from all three of the credit reporting bodies in Australia - Experian, Equifax, and Illion.
You don’t need to pay anyone to handle your credit data or fix anything for you. Errors in your credit report can be fixed for free – you have the right to request that any error is corrected.
Our research found that 40% of Australians checked their credit report between March and June of this year – it pays to be aware of what is happening to your credit health.
3. Know the difference – and importance – between a credit score and credit report
These two are not the same thing. A credit score is a number that allows lenders to see, in a snapshot, how credit worthy you are based on the raw data in your credit report.
This number will change each month depending on whether you pay your bills on time and can be a good gauge of whether someone is ‘credit-worthy’ or not.
Your credit report is your history of credit usage and payments over the last 24 months. This is an important document to understand because of the detail it has in it. It is a key factor on whether or not you will be given access to more credit, so it pays to be aware of what is in it.
4. Be sensible with credit
While it may sound fairly obvious, the golden rule is not to borrow more than you can handle.
Being given a credit card limit of $20,000 will not help you if you aren’t likely to ever use it. On your credit report the entire limit will appear even if you never use the whole amount, so make sure you only borrow what you actually need and can pay back.
Paying your credit card bills and loans on time is crucial to keeping your credit healthy. Be conscious of other repayment obligations – if you are using BNPL services make sure you can afford to have those repayments leave your bank account without missing other important repayments
5. Always ask for help if you are having trouble making payments
If you’re struggling with repayments whether because of COVID-19 or another reason, talk to your credit provider about how they can help. Currently, lenders continue to assist many Australians by way of a payment pause or deferral to help them get through the COVID-19 pandemic, and they may have these or other options available to help you if you’re struggling for any other reason.
Resist the temptation to use more credit to cover loan payments. This can lead to a 'debt spiral' where a small debt can quickly become much larger and unmanageable.
Always remember that if you are struggling to make your repayments on time, talk to your lender. Free help is available from your lender, credit reporting bodies , financial counsellors, and your community legal centre.
