Do credit scores matter when you’re investing?

Bryce: [00:00:26] Welcome to another episode of Get Started Investing, a podcast where we attempt to answer the most common money and investing questions from the get started and equity markets community. If you're joining us for the first time, a massive welcome. Welcome to the equity mates community. We strongly recommend that you do scroll up and start at episode one. Now while we are licensed, we're not aware of your personal circumstances. All info in this show is for education and entertainment purposes. Any advice is general? With that said, my name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you? 

Alec: [00:01:00] I'm very good, Bryce very excited for this episode and interested in this question because when we got it, it's honestly something I haven't thought much about and I kind of thought it was more of an American thing. The question is, what is a credit report or a credit score and why is it important for investors or is it important for investors? And for me, credit scores were always very American. 

Bryce: [00:01:23] I think they are well, they are America. 

Alec: [00:01:25] They probably invented the credit score. 

Bryce: [00:01:27] Why do you think they are American? 

Alec: [00:01:29] I just never really heard them discussed in Australia like growing up or when we're at uni or really ever recently. That's kind of turned a little bit. I know Find launched an app that let you check your credit score and we'll get to that because I have a gripe with the app. Yeah, it just felt like credit. Credit scores were an American thing. 

Bryce: [00:01:48] The good news is when they're not, well, that's good news. But like the news is that they're not. You do get credit reports or credit scores here in Australia. And the reason for that is because lenders use your score to decide whether to give you credit or not. It's pretty simple. 

Alec: [00:02:06] Yeah. The flip side of it is having a good credit score can help you negotiate better deals. 

Bryce: [00:02:11] Yeah, I feel like it's like having Moody's, which we've spoken about in our. 

Alec: [00:02:16] Yeah. This is exactly. 

Bryce: [00:02:17] Long term wealth builders over on equity markets it's like someone saying you're triple-A rated you have triple-A rated credit. Yeah. 

Alec: [00:02:25] Yeah, I do. It's mainly because I haven't really borrowed much in my life. 

Bryce: [00:02:30] Yeah. Well, speaking of that, if you have ever applied for a credit card or a loan or going through a mortgage, then you will have checked your credit score in the background to make sure that you're worthy of taking on credit. 

Alec: [00:02:43] Now, what is a credit score? How is it calculated? This gets confusing because you would think that there would be one universal credit score. But just like when it comes to companies, S&P and Moody's both do their own credit scores and the New South Wales government might be Double-A in one and triple-A in another, we personally get scored by multiple companies as well, and so we actually have multiple credit scores out there. The three companies that you may or may not have heard of. Experian, Illion and Equifax. Heard of any of them?

Bryce: [00:03:23] No. 

Alec: [00:03:23] The only reason I've heard of Equifax is they had a massive data breach. Not ideal when you're collecting everyone's credit information and calculating credit scores.

Bryce: [00:03:33] No, not at all. That's awful. 

Alec: [00:03:36] Massive data breach. Maybe like four years ago. Some time ago. But that's the only one I'd heard of. 

Bryce: [00:03:42] So there's different credit score providers. The formula to get a credit score is then going to be different.

Alec: [00:03:48] But you know what the most confusing thing is? What it's scored out of is also different. So what if you missed that? If you were designing a credit score from scratch, what would it be out of ten? Oh, okay. I would've said 100. 100 feels like a nice universal number. Correlates to percentages. Makes a lot of sense. It's either 1000 or 1200. 

Bryce: [00:04:11] Like 0 to 1000.

Alec: [00:04:13] Yeah. So Illion and Experian give you a score out of a thousand Equifax. Just because they want to be different. Give you a score out of 1200. And so that means your different rankings of excellent, very good average fair and low are different depending on the credit provider. But you want to get even more confusing. Bryce, Illion and Experian both scored out of a thousand but their rankings of average fair and low are different. 

Bryce: [00:04:42] Confusing confusing shakes anyway. But I think at the end of the day, they probably all look at similar things in your credit report, which really boils down to how reliant you are on credit and how good you are managing credit for them to determine a risk rating for you. So what goes into a credit report? There are a number of things. First, they assess the amount of money that you've borrowed over a period of time. That can be credit cards, it can be mortgages, it can be personal loans, whatever. Then they look at the number of credit applications you've made. So that's the reliance on credit. They're going to assess whether or not you're applying for credit for good reasons. Or is this guy or girl desperate for credit and continuously applying for credit cards. Then they look at your repayment history of any loans. Are you good at repaying? How have you managed it and whether. Not if paid on time. And of course, they then look at bankruptcies. Or have you defaulted at any point of time throughout using credit. So that is all taken into consideration to really spit out a score between zero and a thousand or 1200 to give you essentially a risk rating.

Alec: [00:05:47] Yeah. Now, the timing of this episode is quite good. Last week I spoke to Queenie about rewards programs. And one thing that we spoke about was that if you're jumping between credit cards to take advantage of bonus offers or, you know, contact points and stuff like that, all of those credit applications are on your credit score. So be mindful of that. I don't know how much it affects it, but it does affect. It does. So, Bryce, what is a good score? That is the question.

Bryce: [00:06:14] So an excellent score and generally is between 800 to the top of top of the range, 1000 or 1200. And then it varies all of them. It's split into five credit score categories. I guess you can be excellent. You can be very good. You can be average, you can be fair or you can be low. 

Alec: [00:06:33] Yeah, I would say looking at these numbers, 800 plus is great. 600 to 800. Okay. And then 500 and below. And I need some work. 

Bryce: [00:06:47] Needs some work. I guess everyone's probably sitting at home and we are wondering, well, how on earth do we find out what our credit score is? 

Alec: [00:06:54] Well, you know what? To take a step back. Something that I thought and maybe this is just an American thing. I actually thought you got dinged if you checked your credit score like you got penalised by. Honestly, I think it might be an American thing. I don't know if it's true, but I used to have the idea that every time you checked your credit score, it would harm your credit score. 

Bryce: [00:07:14] That would be red hot. 

Alec: [00:07:15] Well, you talk about something and I'll look it out. 

Bryce: [00:07:18] Wow. So, yes, if you're wondering how you can get it, the good news is that you actually have a right to get a copy of your credit report for free every three months. So if it is something that you're interested in, you do. You are able to get a year for free now. Money Smart suggests that it is worth getting a copy at least once a year to understand where your credit report sits and to do so. There are three, as we've already spoken about, three credit reporting agencies that you can call to get your credit report. So that's Experian, Illion and Equifax. You can Google all three of them or we will include their phone numbers in the show notes. So, again, we're going to take a quick break. And on the other side, I have my credit score. I also have my wife's credit score. And surprisingly, surprisingly, they are different. Well, not surprisingly, I guess they are different. So we're going to find out on the other side who has the best credit score. All right, Ren. Welcome back. We're sitting here figuring out whether or not it is harmful to check your credit score in the US as we discuss what a credit report is and why it is important for investors. So, Ren, over the break, you did a bit of Googling.

Alec: [00:08:35] Yeah. Now it looks like there are two types of checking your credit scores. Hard checks and soft checks. Soft checks are just when you check your score like you have done for this episode. According to the Equifax website and a few other websites, it doesn't hurt your credit score. In fact, according to Equifax, regularly checking your credit scores is a good way to ensure information is correct. But then hard checks are like when you check your credit score in the process of applying for a credit card or a mortgage or something like that. And those hard checks may. But in my quick Googling, I haven't got certainty on the effect, but I think they do. 

Bryce: [00:09:17] But that was probably because you're applying for credit. 

Alec: [00:09:20] Yeah. Yeah. Look, the break was not long winded. If you want me to do a thorough go, go. We need more ads. 

Bryce: [00:09:25] In this sense, it makes sense. Anyway, 

Alec: [00:09:27] Just a caveat. It's not like we've just made Bryce go and check his credit score and I've just not done it. I tried to find a says they let you check your credit score to find it. Couldn't verify my identity. So. Okay. We'll have to bring that up with Fredricka Buster after this. 

Bryce: [00:09:43] So I as has become evident through, you know, over the course of the year in the process of applying for a mortgage. And in doing so, they you have to do a credit score. So it's the number one thing that they quickly check off the list. 

Alec: [00:10:00] Let me guess your credit score. Yeah. You've had a few credit cards in your day. Yeah. You're pretty disciplined about paying them off. You haven't applied for a mortgage before. You haven't had, like, a car loan or anything like that. Had NAB equity build a loan, but you've paid it off. I'm going to say you're the lower range of excellent. I'm going to say your 825. 

Bryce: [00:10:21] I'm your close. My credit score is 868. Oh yeah. But Harriet's is coming at it at 904.

Alec: [00:10:30] Wow. Yeah. Does it say what's dinged you and what's pushed. 

Bryce: [00:10:35] No, it just says these are both great scores. Anything above 750 is considered good by the banks. So 750 actually puts you in a very good position and so they're saying anything above 750 is considered good so we're okay and we got that. 

Alec: [00:10:51] Give him a discount on his mortgage banks. 

Bryce: [00:10:53] Exactly. Come on. Well I guess that flows into the next question Ren is how does this affect our lives And it's pretty evident the better the score, the better opportunity you have to get access to credit. Yeah, plain and simple. 

Alec: [00:11:07] Do they like what it bank? It's not like a bank would give you a higher interest rate if your score was low, or would they just not lend to you? Is that a question that you don't know the answer to? I don't know. Because of your incredibly high credit score. You don't worry about that. 

Bryce: [00:11:20] Well, my feeling would be they would deem you at higher risk. Yeah. They probably lend you less. 

Alec: [00:11:25] But, yeah. 

Bryce: [00:11:26] That's my Gut feel. 

Alec: [00:11:27] But it's not like they give high interest, you. 

Bryce: [00:11:29] No, because they probably just like this guy can barely manage a low interest Rate. As an investor. It really doesn't make an impact on our lives if you're using your own credit. 

Alec: [00:11:39] And I guess if you're on a margin loan or something. Yeah, maybe. 

Bryce: [00:11:42] A margin loan or an equity builder. But if I'm just using my cash and doing my dollar cost averaging, it doesn't impact you in any way. Shape. Yeah. 

Alec: [00:11:51] But in saying that we all dream of owning a house one day and having a good credit score can help. Well, as you said, it's one of the first things they check. So the question is, if we know how to check our credit score, contact one of the credit reporting agencies if we don't like what we say. What can we do to improve it? 

Bryce: [00:12:10] Two things. Firstly, check that what's in the report is accurate. I think it is fine. They were trying to improve it. Find your identity to start with. But once you get the report, make sure that all the loans and everything listed on there are accurate and are your name, date of birth, everything needs to be correct. Correct. Because if it's not, you may be getting put into a pile of something else. So make sure that everything on there is correct. But secondly, just be aware of what goes into creating your credit score. So if you are flip flopping between credit cards, that's going to impact it. If you are looking for points, if you are unnecessarily using credit cards for consumer purchases and not paying it off as you meant to pay it off, that's going to impact it. All those sorts of things. Buy now, pay later. All those credit options impact your credit score. So if it is a long term goal to get a house or that you're going to need credit in a good way, definitely keep it in mind. I would have said that I haven't accessed a lot of credit in my life and I'm on the lower end of excellent, if that makes sense. Like if I started at 1000, I've fallen. 

Alec: [00:13:17] Long way, But you don't know. That's how that works. One thing that you mentioned there about your details being wrong, it's probably an important one to stress given the amount of hacks that are and, you know, data breaches that are happening now, saying your credit score is a good way to say if someone has stolen your identity or tried to use your identity to apply for a credit card or something like that and money. Smart ASIC's website has a page on credit repair. So if you're not happy with your credit score, if you think that there's incorrect information on it. Money Smart have details on how you can actually go about fixing that will include the link to the credit repair page in our show notes. Or you can just Google money smart credit repair.

Bryce: [00:13:59] We set out to answer the question of what is a credit report and why it is important. I hope we've been able to do that. Please keep the questions coming as we attempt to answer the most common money and investing questions from you guys, our community. As you would have heard over the last few episodes, we've had plenty rolling in, but if you could do one thing before you move on to listening to your next podcast, and that would be to share, get started investing with one of your friends, we would really appreciate it. Word of mouth always goes a long way, and if you're giving a trusted recommendation to a mate, then we would really, really appreciate that. But then we will be back next week. 

Alec: [00:14:32] Sounds good.