ALG Australian Lending Group

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  • What is a Credit Score?

    Is my credit scores actually important? What is it really for?

    To begin, we’re going to define the difference between a credit file/report and a credit score.

    A credit report holds a variety of information about you, including both personal and financial elements. An assessment of your financial position is made using both the positive and negative data on your credit report. The outcome of this assessment is presented as a number which acts as a snapshot for the entire report. This number is your credit score and it appears on the front page of your credit report.

    Your credit score, therefore represents your past and current financial position. It gives lenders (the bank) an insight as to what kind of customer you may be. For example, if you have a high score then the bank will be more inclined to lend to you because you have a positive history in borrowing (and repaying) money.

    Lenders use a combination of your credit score and the details from your credit report to determine whether they want to lend to you. Your credit score and credit report are important because they can be the difference between getting a loan approved or declined.

    So what is considered to be a good credit score?

    When considering the various credit reporters in Australia, there are many different standards of a ‘good’ credit score. Fortunately, Equifax is a credit reporter in Australia that largely dominate the market. So, we use their standards as a benchmark and refer to their product when discussing specifics throughout this article.

    Equifax credit reporting can present a score between 0 and 1200. So the higher your score, the better. Most lenders would consider a credit score of 600 to be sufficient. Whereas having a score of approximately 800 would be considered above average. A client with a higher credit score is more desirable to lenders because they are seen as ‘less risky’. There are some lenders willing to provide finance for scores lower than 600. But unfortunately, they usually charge significantly higher interest rates to compensate for the risk they are taking on.

    What if I have a bad credit score?

    If you currently have a bad credit score then you’ll be pleased to hear that you have the ability to make it better! Comprehensive credit reporting was introduced into Australia in 2014. This means that all of your positive interactions with loans and repayments are now recorded on your credit file. Whereas it used to be that only negative interactions were recorded. So, repaying credit cards on time actually increases your score. Whilst defaulting on credit card repayments reduces your score.

    How do I find out what my credit score is?

    You can find your credit report online and view it for free annually here. It’s a great idea to utilise your yearly checks so that you can understand more about your credit file and how it’s impacted throughout the year. This also enables you to identify and rectify any misinformation or wrongfully recorded data such as personal details or missed repayments and defaults. You will essentially have the information needed to better your credit score and track it’s improvement.

  • Interest Rate vs. Comparison Rate – What’s The Difference?

    Most of us already know what the interest rate is when talking about loans. However, the comparison rate is less frequently talked about. It was actually created to benefit consumers by allowing them to accurately compare finance products such as home loans or car loans between different banks and non-bank lenders.

    Interest rate: A proportion of the loan that is paid by the borrower in addition to the original loan value which is presented as a percentage.

    Comparison rate: A summation of the costs incurred from a loan inclusive of interest rate and all additional expenses such as account keeping fees.

    Should I look at the interest rate or comparison rate?

    Both.

    The interest rate is no doubt an important aspect of every loan. Generally speaking, the lower, the better. So it’s helpful to know what interest rate is being offered on the loan that you’re considering.

    However, because the interest rate alone doesn’t consider additional costs such as account keeping fees, early exit fees etc. It can sometimes be misleading. A lender could offer a loan with a really low interest rate but have excessive additional fees which mean that you end up spending considerably more than expected.

    Here’s a simplified example comparing 2 loans:

    Loan A has a higher rate and lower fees. Loan B has a lower rate and higher fees. In some circumstances the cost of fees can outweigh the low interest rate. This is an example of that happening.

    Loan A
    $50,000 borrowed.
    Interest rate 3%.
    5 year term.
    Fees and charges = $950
    Final cost = 58,913.70

    Comparison rate = 3.57%

    Loan B
    $50,000 borrowed.
    Interest rate 2.5%.
    5 year term.
    Fees and charges = $2490
    Final cost = 59,060.41

    Comparison rate = 3.62%

    When considering the comparison rate, it shows us that Loan B is the more expensive loan, despite having a lower interest rate. Without looking at the comparison rate, a borrower may choose Loan B under the impression that it would be the cheaper of the two and then end up spending more compared to Loan A. It’s important to note that lenders don’t advertise the amount of their additional fees, which is why the comparison rate is such an important element in the finance industry.

    A good rule of thumb to follow is that the larger the gap there is between the interest rate and the comparison rate, the greater you are getting charged for additional fees. For example, an interest rate of 5% and a comparison rate of 8% for the same loan means you are getting charged a significant amount in fees that are separate from the interest repayments.