The Three Reasons Why You Need to Keep Your Credit Score as Healthy as Possible
Published 1:20 am 14 Feb 2020
In this article, DG Institute’s Dominique Grubisa examines the importance of credit score. Specifically, she looks at the advantages of credit score strengthening.
Australia is a country that is in billions of dollars of household debt. And don’t just take our word for it. According to a report published on ABC News:
“The average Australian credit card balance is $3,258, according to comparison website Finder. Of that amount, about two thirds — $1,986 — is the average amount of accruing interest.
And the total amount we owed as of June 2017 was nearly $45 billion, according to the financial regulator’s report.”
We take loans out for almost everything that we buy. From the house that you’re living in to the car on your driveway, you’re creating debt everywhere.
And it’s that debt that can come back to bite you when you’re trying to build wealth. Every loan you take out or credit card that you use affects your credit score rating. And if you don’t have a good credit record, lenders will deny your applications.
We’re going to look at some of the advantages of a good credit score by looking at the reasons why you need to strengthen yours. But first, let’s dig deeper into the Australian debt issue.
Australia – The (Almost) Most Indebted Country in the World
As ABC News explains, Australia is currently the second most indebted nation in the world:
“Hovering around 120 percent of GDP — that is everything the nation produces in a year — Australia’s household debt is second only to Switzerland, and we’re not too far behind the Swiss.”
What this tells us is that our debt, as a whole, has grown faster than the economy. In fact, it would take over a year’s worth of Australia’s total economic output to repay the enormous amount of debt we have.
We’re already seeing the effects of this record debt on the country. Right now, we have record low interest rates because the economy’s struggling so badly. Australians just don’t have enough money to give businesses in the country a shot in the arm.
We’re spending all of our cash on servicing our debts.
We’re repaying mortgages, personal loans, and credit cards. That means we’re not spending enough on real consumption. And when that happens, businesses start to struggle and unemployment rises.
That leads to even more debt getting created as people start borrowing just to survive.
Worse yet, the policy of forward guidance just isn’t working out for the government. With forward guidance, economists will continually focus on a message, such as “the interest rates are dropping”.
The hope is that this message will make consumers feel a little richer, which results in them spending more on real consumables. If this happens, the government can avoid dropping rates because the economy gets a boost.
Only it didn’t happen.
The rates did eventually drop because people just don’t have enough money to spend.
So…where does all of this leave you, especially if you’re looking to build wealth?
Well, you need to figure out a way to pay off your existing bad debts. Only then can you get a credit score boost that may allow you to leverage what you have to build your portfolio.
There’s just one question to answer here:
What are the benefits of a good credit score?
Let’s look at the advantages of credit score maintenance by looking at the reasons why you should improve it.
Reason #1 – You Avoid Collection Agencies
The more debt you accumulate, the more likely it is that you’ll start missing payments. And these missed payments can take a typical credit score and turn it into a bad one in a matter of months.
What’s worse is that your lender will start chasing you for the money that you owe.
Now, let’s assume that you still don’t repay the money that you owe them and the bank stops chasing. You may assume that you’re in the clear at this stage. But what’s more likely is that the bank has sold your debt to a collection agency.
Now, you have another organisation chasing you for the money left unpaid. And in many cases, these agencies don’t follow the letter of the law in their efforts to collect. Thus, you’re opening yourself up to intimidation and constant harassment for the money that you owe.
Of course, your credit score keeps getting worse as all of this goes on. The debt that you owe doesn’t go anywhere, which means you experience the disadvantages of bad credit. That means nobody will lend to you and you have to deal with collection agencies.
The best way to avoid all of this is to keep your debt low and make your repayments on time.
Reason #2 – Your Credit Score Affects Your Interest Rate on a Loan
Let’s say you’ve enquired about getting credit cards several times over the last couple of months. Each of those enquiries can knock your credit score down by 50 to 100 points.
Why is that so important?
As your credit score gets lower, lenders will take notice.
Now, when you apply for a loan, they’re going to apply a higher interest rate. That’s because your low credit score shows them that you carry more risk. Thus, they want to make more money from you to protect themselves in case you default.
By contrast, having a good credit score means that you’re more likely to get the advertised interest rate.
Think of your score as a credit rating number scale. When the score falls to a certain rating, your ability to access lower interest rates disappears. It’s only when you pull the score back above the appropriate level that you can get better rates again.
Reason #3 – You Protect Yourself from Unwarranted Enquiries
In a recent interview with us, former debt collector Lawrence Barlow told us the following story:
“We recently had a client in our portfolio who had a credit score that was sitting somewhere around about 400. And what we found is that the credit file had been sold and resold.”
This client paid all of his bills on time and everything else was fine. But as it turned out, a number of organisations had made enquiries about his credit score. And each of those enquiries pulled the score down.
Thankfully, catching the issue allowed Lawrence and his team to remedy it. But imagine the damage that this issue would cause you if you already have a low credit score.
Imagine that you had a credit starting score of 400, for example. In this scenario, you’re likely to lose a couple of hundred points from that score because of these repeated enquiries.
The point here is that maintaining a strong credit score provides you with protection. That means you can absorb the hit when something like this happens.
If you have a low score, it’s much more difficult to come back from such an issue.
Take Care of Your Credit Score
Those points are why you need to take care of a credit score explained. The advantages of credit score maintenance include easier access to loans better interest rates. Plus, you avoid issues with debt collectors and give yourself a buffer if something untoward happens.
Lawyer, Asset Protection Specialist and Property Educator
Dominique Grubisa is a practising legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at email@example.com
This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.