A story in the newspapers this week told of a company that offered a free credit score and had its website crash from all the traffic.

I’m heartened by the story because it suggests there are many people out there who are interested in how the financial services industry scores their credit worthiness, they know it affects their ability to borrow in in the future, and – I assume – they want to do something about it.

A credit score tracks your application for and repayment of debt. Obvious debt includes a mortgage, car finance and credit card, but phone companies and other utilities also run credit accounts.

A credit reporting agency receives information from finance companies, banks and utilities, and adds it to your credit file. Those things worth reporting include arrears on a bill (usually more than 60 days late), missed loan repayments, new applications for credit and defaults. Most of this information remains on file for around five years.

Credit reports collect change of address, change of job, court writs and insolvency action. And they capture information such as you becoming a guarantor on someone else’s loan.

While an agency collects your credit history and gives you a score, it’s the lender you are dealing with who makes the final credit-scoring, in deciding what kind of risk you represent.

New home buyers, especially, can become nervous when they approach a mortgage lender – they can’t remember their credit histories and what might be in a credit file to hinder their chances.

There are a few steps people can take:

  • Clean up Start by getting your repayments organised for credit cards, bills and loans. You can’t change history but you can influence your financial future.
  • Job and house Take the easy points on a credit score and don’t change your address or job for a year before applying for a mortgage.
  • Applications Try not to apply for unnecessary credit. Typically people that chase zero balance transfer rates and change their credit cards multiple times each year can get scored down, so be careful.
  • Get a report You can go to the web site of a reporting agency such as Veda to access your credit report. Once you know your score – and the reasons for it – you can start planning. Note that obtaining your credit report does not impact your credit score.
  • Broker Some mortgage brokers provide a free credit report because it will help determine which lenders will consider your loan application. If you’re working with a mortgage broker, be sure to ask about this service.
  • Build the positive Changes introduced this year mean you get to build a score on positive credit behaviour. This means that every on time repayment is a small positive mark on your credit file. It’s worth thinking about how to take advantage of this.

Credit reports are a fact of life if you want to borrow money – they can be really helpful, so learn how they work and start planning. Good luck.

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Posted by Mark Bouris – The Sunday Age on 7th September, 2014