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5-common-misconceptions-about-credit-scores

5 common misconceptions about credit scores

Small businesses can experience high growth periods as well as low cash flow periods. From time to time a small business might require additional access to funds. Without the ability to borrow funds and obtain credit from a lender, opportunities for business expansions may be limited.

Credit is an agreement between a lender and a borrower by which the lender provides finances or resources to the borrower. The borrower then pays back the loan to the lender over a period of time. One way to ensure your access to money is fluid is to stay on top of your credit profile, including your credit score. 

The financial activity you do on a daily basis can have an impact on your financial profile. Credit scores are ratings applied to your financial profile and they can impact and enhance your eligibility for borrowing money. The better your credit history is, the higher your score may be. Having a higher credit score makes it easier for you to borrow money and also impacts the amount of money that you can borrow. For example a landscaper might need a new truck to transport materials. If they have a strong borrowing history of repaying bills and credit cards on time, they are more likely to receive the loan required for the new machinery. Provided they meet the other lending criteria, of course. 

In Australia, your financial profile will be ranked, usually from 0-1000. This number can vary depending on the credit bureau. Credit scores help the lenders determine whether or not they will lend you money. Amongst other criteria. The higher your score, the lower the possible risk to the lender. The lower the score, the higher the possible risk to the lender.

Let’s explore the common misconceptions that exist around credit scores: 

1. Not taking out credit improves your credit score

A common misconception could be the thought that, ‘If I don’t take out a loan or credit card, then that shows I am good with managing my money and therefore will be given a higher credit score’. This is actually incorrect. To improve your credit rating, a good approach could be to have a regular history of repaying bills, loans and debts. This can assist in showcasing you as a trustworthy borrower. For example, by utilising a small business loan and making the repayments on time you can work towards building your credit history and credit score whilst having access to funds when you need them.

2. You will never get rid of a bad credit history

Blemishes on your credit report such as bankruptcy, late payments and defaulted payments may impact your ability to borrow in the short term. However, they will not necessarily impact you forever. Bankruptcy, which is known to be the biggest impact to your credit, will bar you from taking any new loan for a period of time. After that, you may borrow money again from a lender if they choose to. A bankruptcy will remain on your record for at least 5 years.

3. A large credit card limit will improve my credit report

Credit card limits have no effect on credit reports. However, having a credit card with any limit and being able to make regular repayments on time is what can improve your credit score.

4. A high income will improve my financial profile

Income has no impact on your credit report. People with a high income may have a bad credit score, and those with low income could have an excellent score. It all comes down to the ability to make repayments on time. Credit reports are normally calculated using many varied components of credit data. These include your payment history, amounts owed to other lenders, length of credit history, and any new credit. Credit bureaus don’t consider your current or past income when determining credit scores. 

5. Checking your credit report will impact your credit rating 

Regular checking of your credit report will not impact your credit score. In fact, regular checking of your personal and business credit report might help you improve your profile as you can take action to improve your score. 

What affects credit scores?

Getting a bad credit rating may affect you in the short term. There are a number of reasons why you may end up with a bad credit rating. The main reason for bad credit rating is missing payments. These can include: 

  • Paying your bills late: Paying on time makes you a good borrower or a trusted recipient of a service such as internet, phone service, electricity, insurance etc. The binding agreement between provider and consumer is that services are paid for on time. If not, this can negatively affect your credit report. 
  • Filing for bankruptcy: In times of dire straits filing for bankruptcy can happen. It is always a good idea to seek every alternative solution before filing for bankruptcy as this can vastly affect your credit rating and borrowing capacity for several years. You can find more information on government resources for bankruptcy here.
  • Having accounts sent to debt collectors: If you have a bill or debt that is not paid on time despite several notices, the payment handling might be sent to a debt collector.

How can you improve your credit rating?

To build a credit history, you need to have opened accounts that report to credit bureaus. There are many ways to build a credit history, including paying for general bills and utilities on time.

One of the most common ways to build a personal credit history is to use a credit card responsibly. When you spend on your credit card you are essentially taking a small loan of money. Your consistency in paying that money back and on time makes you a good borrower. Doing this over a long period of time shows that the borrower can be trusted in borrowing and repaying money. It also proves that you have the cash flow coming through to meet the repayments. You can repeat this process for several other credit options. 

A small business may look into applying for a business loan either from a traditional bank or an online lender like Lumi that offers flexible funding options and an easy online business loan application with outcomes in 2 business hours. Options for small businesses that you might not have considered include Small Business Loans or taking out a Business Line of Credit. A flexible lender such as Lumi can provide you with tailored business lending solutions. 

Lumi’s application process is quick and streamlined, you will know within hours if you have been approved. Our approach is clear and transparent meaning you know exactly what fees and terms are applicable to your loan. And our payment schedule can be flexible to support your business.

A good credit score can give business owners a better chance of getting a business loan approved. It can also influence and improve the lending conditions of the loan such as more affordable rates and better terms. 

If you’d like to get in touch to discuss finance options for your business, reach out to our business loan experts via support@lumi.com.au or call us on 1300 00 5864. 

Your Lumi team

Post Author: Vanessa Muller

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