How to build a good credit rating
About a month ago my partner and I went shopping for a new car. After hours of trying to convince her and arguing my case, we (and by we I mean she) decided to purchase a second-hand car that was a couple of years old. The “discount” that one gets versus a brand new car almost makes it a no-brainer (almost).
Anyway, we shopped around and found a suitable sized car, 2 years old with low mileage and excellent interior & exterior. We negotiated a price of $23,500 and signed the papers. The next step was when my eyes were opened, financing.
I was offered a comparison rate of 14.5%. Yes, you read that right, fourteen and a half percentage points on a loan of $21,000 (we were paying a $2,500 deposit). I asked them why it was so high and the reason was because my credit rating was not great. We started shopping around and it didn’t get better. In fact, we started hearing worse things and even got asked, “How many loans have you defaulted on?”. I didn’t have a credit card till about 6 months prior to the purchase of the car and always paid it off in full on time. All my bills were on direct debit and I didn’t have any other debt.
I was utterly bemused. I had to get to the bottom of this. I called up one of the biggest credit rating companies in the country, Equifax and demanded an explanation. After speaking to them and to my horror, apparently the bad credit rating was completely justified (although I still feel hard done by).
My First Mistake – Credit Cards
When I was looking to get my first credit card, I narrowed it down to 3 cards, Amex, Citi and Westpac. I applied for the Citi card. After 2 weeks and no response, I applied for the Amex. After 1 week I called and apparently had to still wait so I decided to apply for the Westpac card. Each time I applied for a card, I agreed to a credit check. This credit check went onto my file and even though I only ended up with 1 card, my file showed “This bloke appears to be in desperate need for credit with 3 applications in the space of 4-5 weeks”.
My Second Mistake – Connectivity
3 months prior to the credit card application, I purchased a new handphone. However, I didn’t just decide on 1 provider, I applied to 2 after the first one informed me I had to wait 4 weeks for delivery. Once again, 2 credit checks went onto my file. Even though this was not a loan or credit, it was a form of it and still qualified.
My Third Mistake – Credit
I was flattered when I received my credit card and was provided with over $25,000 of credit, thinking my immaculate credit must have been seen as me being such a responsible/trustworthy customer. However, this was part of my undoing as I had a risk of upwards of $25,000 and that any subsequent credit will take that into account.
I ended up paying for the car in cash and whilst I saved on interest, I severely depleted my savings, but did not really have much of a choice. With that, I’d like to offer you 5 simple points from all my research, so that you keep your credit rating up and do not end up in a surprise situation like I did.
1. Diligence - Always pay your bills on time. You don’t want to be recorded as a risk. Even the smallest of bills, like utilities and handphones.
2. Discipline - Don’t apply for credit. Credit “shopping” is one of the most hurtful items to your credit. When your credit is checked, it goes on your file. Multiple checks raises flags with potential lenders. This includes simple things like internet, mobile phones and store cards.
3. Control - Keep your balances low. If you’re struggling, get a 0% balance transfer and pay it off over a period. Consistent payment and reducing your balance is key.
4. Consistency - If you keep using a card for certain payments, continue to do so and pay them off in full regularly.
5. Credit provided – If you don’t need the amount of credit you’ve been provided, reduce it. It’s nothing to feel proud of. The government has enforced that all financial institutions have to make it easy for customers to reduce their credit.
Remember, credit is not your friend, it’s a blood sucking leech in your life. All those points that you collect, or they give you, are worthless. Honestly, they aren’t worth it. They are just gimmicks that draw you in with the one aim, force you into a corner and bleed you dry. Cash is king, for with it, you’re unstoppable.
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Author: Akash Devasar & Co. | We speak numbers | https://www.adevasar.com