How to Shop for Loans and Credit Cards Without Damaging Your Credit Score

Maintaining a good credit score is essential for securing favourable loan and credit card terms, as it reflects your financial reliability to potential lenders. Understanding the nuances of the credit system can help you navigate the borrowing process more effectively.

This guide provides specific tips on shopping for loans and credit cards while safeguarding your credit score, ensuring you make informed financial decisions without inadvertently harming your creditworthiness.

Understanding Credit Scores

What is a Credit Score?

A credit score is a numerical representation of your creditworthiness, used by lenders to assess the risk of lending you money. In Australia, credit scores typically range from 0 to 1200, with higher scores indicating lower risk to lenders.

Read more about credit scores in our previously published articles:

Several factors impact your credit score:

• What is a Good Credit Score? Getting Your Credit to Work For You
• How Are Credit Scores Calculated in Australia?
• How to Check My Credit Score in Australia?

How Credit Scores are Used by Lenders

Lenders use your credit score to evaluate the likelihood that you will repay your debts. A higher score can make you a more attractive candidate for loans and credit cards, as it indicates lower credit risk. This can affect not only whether you are approved for credit but also the terms of the credit offered.

Loan and Credit Card Approvals

Lenders typically look for a credit score of at least 600 for car loans, although some may consider scores as low as 550. For other types of loans and credit cards, a higher score increases your chances of approval and may provide access to better rates and terms.

Interest Rates and Terms

Your credit score also influences the interest rates and terms of your loans and credit cards. Higher scores generally lead to lower interest rates and more favourable loan conditions, saving you money over the life of the loan. Conversely, a lower score can result in higher interest rates and less favourable terms.

Impact of Credit Enquiries

Credit enquiries, or credit checks, are divided into two main types: hard enquiries and soft enquiries. Each type has different implications for your credit score.

Hard enquiries occur when a financial institution, such as a bank or lender, checks your credit report as part of their decision-making process for a loan or credit card application. These enquiries require your permission and stay on your credit report for up to five years in Australia.

Soft enquiries, on the other hand, are checks that do not impact your credit score. They can happen without your explicit consent, such as when you check your own credit score or when a company checks your credit for a pre-approved offer.

Examples of Each Type

• Hard Enquiries: Applying for a mortgage, car loan, personal loan, or credit card.
• Soft Enquiries: Checking your own credit score, employer background checks, and pre-approved credit card offers.

Short-term and Long-term Impacts of Credit Enquiries

In the short term, hard enquiries can cause a small drop in your credit score, but this impact usually diminishes over time. However, having multiple hard enquiries within a short span can have a cumulative negative effect, potentially affecting your ability to secure credit on favourable terms. In the long term, as these enquiries age and new positive credit behaviours are reported, their impact lessens.

Frequency and Timing Considerations

To minimise the negative impact of hard enquiries, it’s advisable to limit the number of credit applications you make. If you need to apply for multiple credit products, try to spread them out over time rather than applying for several at once. Regularly checking your own credit score is a good practice and doesn’t harm your credit score since it counts as a soft enquiry.

Research and Preparation

Researching before applying for loans or credit cards is crucial. It helps you find the best deals, avoid unnecessary fees, and understand the terms and conditions of your financial products. This preparation can save you money and protect your credit score from unnecessary hard enquiries.

Tips for Researching Loans and Credit Cards

1. Compare Interest Rates, Fees, and Terms: Look at the annual percentage rates (APRs), any hidden fees, and the repayment terms. Understanding these factors can help you choose a loan or credit card that fits your financial situation.
2. Read Customer Reviews and Ratings: Customer feedback can provide insights into the lender’s customer service, the actual interest rates offered, and any potential issues you might face.
3. Utilise Comparison Websites and Tools: Websites like Canstar, Finder, and Mozo allow you to compare various financial products side-by-side, making it easier to see which offers the best deal for your needs.

Features and Benefits

When comparing loans and credit cards, consider the following features and benefits:

• Interest Rates: Lower interest rates mean you’ll pay less over the life of the loan or on your carried credit card balances.
• Fees: Be aware of annual fees, late payment fees, and any other charges that might apply.
• Rewards and Perks: Some credit cards offer rewards programs, cashback, or travel points. Assess if these benefits outweigh any associated costs.
• Flexibility: Check the flexibility of repayment terms, credit limits, and any options for early repayments or balance transfers.

Reputable Comparison Sites in Australia

Here are some trustworthy comparison sites to start your research:

• Canstar: Offers comprehensive comparisons of various financial products, including detailed reviews and ratings.
• Finder: Provides side-by-side comparisons of credit cards, loans, and other financial products, along with user reviews and expert analysis.
• Mozo: Another excellent resource for comparing financial products, with easy-to-use tools and calculators to help you make informed decisions.

Pre-Approval and Conditional Approval

Pre-approval is a preliminary evaluation by a lender to determine how much you are eligible to borrow before you formally apply for a loan. It involves a basic assessment of your financial situation, including income, expenses, and credit history. The process typically requires you to submit some financial documents, such as payslips and bank statements, and the lender will provide an estimate of the loan amount you can qualify for.

Benefits of Pre-Approval

1. Clarity on Budget: Pre-approval gives you a clear idea of your borrowing capacity, which helps in setting a realistic budget for your purchase.
2. Stronger Negotiating Position: With pre-approval, you can confidently negotiate with sellers, as it shows you are a serious buyer with financing ready.
3. Faster Processing: Once you find a property or make a decision, having pre-approval can speed up the final approval process since some of the groundwork is already done.

How to Obtain Pre-Approval Without Affecting Your Credit Score

To obtain pre-approval without negatively impacting your credit score, consider the following tips:

1. Limit Applications: Apply for pre-approval with only one or two lenders to avoid multiple hard enquiries on your credit report.
2. Soft Enquiries: Some lenders offer pre-approval with a soft enquiry, which does not affect your credit score. Make sure to ask lenders about this option before applying.
3. Use Comparison Tools: Utilise online comparison tools to find the best lender for your needs before applying, thus reducing the number of applications.

Approaching Lenders for Conditional Approval

Conditional approval is similar to pre-approval but often involves a more thorough assessment. It is usually sought after finding a property and includes specific conditions that must be met for final approval. To approach lenders for conditional approval:

1. Gather Documents: Prepare detailed financial documents, including proof of income, expenses, and existing debts.
2. Understand Conditions: Clarify any conditions set by the lender, such as property valuation or additional documentation.
3. Communicate Clearly: Maintain clear communication with the lender to ensure all conditions are understood and met promptly.

Impact of Pre-Approval on Credit Enquiries

Pre-approval can impact your credit enquiries in the following ways:

1. Hard Enquiries: A pre-approval application usually involves a hard enquiry, which can slightly lower your credit score and remain on your report for up to two years.
2. Soft Enquiries: Opting for lenders that use soft enquiries can help avoid any negative impact on your credit score.

Timing Your Applications

Timing your applications for loans and credit cards is crucial for maintaining a healthy credit score and securing favourable terms. Here are some specific strategies:

Spacing Out Applications

Applying for multiple loans or credit cards in a short period can negatively impact your credit score due to multiple hard enquiries. Aim to space out your applications by at least six months. This gives your credit score time to recover and demonstrates financial responsibility to lenders.

Coordinating with Life Events and Financial Needs

Align your credit applications with significant life events and financial needs. For instance, if you’re planning to buy a home or car, it’s wise to avoid applying for other forms of credit in the months leading up to your major purchase. This approach ensures you maintain a strong credit profile when you need it most.

Importance of Applying for Credit Selectively

Be selective about the credit you apply for. Only apply for loans or credit cards that genuinely meet your needs and offer favourable terms. Research thoroughly and choose products that align with your financial goals, rather than applying indiscriminately.

Focusing on Quality Over Quantity

Quality over quantity is a key principle. Instead of applying for several credit cards with mediocre benefits, focus on obtaining one or two high-quality cards that offer substantial rewards, lower interest rates, and favourable terms. This approach helps in managing credit responsibly and avoiding debt traps.

Avoiding Unnecessary Applications

Avoid applying for credit on a whim or without a clear purpose. Each application impacts your credit score, so ensure you have a valid reason before proceeding. Use online tools and resources to compare different credit options and make informed decisions.

Using Soft Enquiries to Your Advantage

Soft enquiries, or soft pulls, are credit checks that do not affect your credit score. They are conducted for informational purposes, such as when you check your own credit or when lenders pre-qualify you for offers. Here’s how you can use them to your advantage:

Monitoring Your Own Credit

Regularly checking your credit score allows you to stay informed about your financial health without impacting your score.

Did You Know 💡You can monitor your credit score for FREE through Tippla? Aside from this, our platform also gives you the opportunity to manage your finances seamlessly.

Pre-Qualification Offers

Take advantage of pre-qualification offers from lenders, which use soft enquiries. These offers give you an idea of what loans or credit cards you might qualify for without a hard enquiry impacting your credit score. Websites like Finder and Canstar allow you to compare pre-qualified offers from various financial institutions.

Resources for Soft Enquiries

Utilise resources that offer soft enquiry checks to make informed financial decisions. Tools like Tippla and My Credit File from Equifax let you access your credit score and history, helping you understand your creditworthiness.

Credit Monitoring Services

Credit monitoring services such as Experian and Equifax provide ongoing access to your credit information, helping you spot potential issues early. These services can alert you to any changes or new credit enquiries on your report, enabling you to address them promptly. Additionally, services like Tippla offer a similar function, providing notifications about updates to your credit report and helping you manage and protect your credit profile effectively.

Financial Institutions Offering Soft Enquiry Checks

Many financial institutions, including major banks like Commonwealth Bank and ANZ, offer soft enquiry checks for pre-qualification purposes. Using these checks, you can explore loan and credit card options without impacting your credit score.

Building and Maintaining Good Credit

Tips for Building a Strong Credit Profile

Timely Payment of Bills and Debts

One of the most crucial steps in building a strong credit profile is paying all your bills and debts on time. Whether it’s your electricity bill, phone plan, or credit card, timely payments demonstrate reliability to lenders. Setting up automatic payments ensures you never miss a due date.

Keeping Credit Utilisation Low

Credit utilisation refers to the percentage of your available credit that you are using. It’s advisable to keep this ratio below 30% to show that you manage your credit responsibly. For instance, if you have a credit limit of $10,000, try to keep your balance under $3,000.

Regularly Reviewing Your Credit Report

Regular checks on your credit report can help you stay informed about your financial standing and catch any discrepancies early. This practice also allows you to track your progress over time and understand how your financial behaviour affects your credit score.

How to Obtain a Free Credit Report in Australia

You can obtain a free credit report once a year from major credit reporting agencies like Equifax, Experian, and illion. You can request these reports online through their websites. Keeping an eye on your credit report can help you spot any inaccuracies or fraudulent activities.

Disputing Errors and Inaccuracies

If you find errors on your credit report, it’s essential to dispute them promptly. You can contact the credit reporting agency and the entity that provided the incorrect information. Provide any necessary documentation to support your claim and request a correction. Resolving these issues can improve your credit score and ensure your report accurately reflects your financial behaviour.

Seeking Professional Advice

If you’re facing financial difficulties, making significant financial decisions, or need help managing your money, it may be time to consult a financial advisor or credit counsellor. Situations like planning for retirement, buying a home, or dealing with debt are common reasons to seek professional advice.

Professional advisors and counsellors can provide tailored advice to help you achieve your financial goals, create budgets, manage debt, and make informed decisions. They offer an objective perspective, which can be invaluable when navigating complex financial situations.

Finding Reputable Advisors in Australia

It’s important to find a licensed and reputable advisor. The Australian Securities and Investments Commission (ASIC) maintains a register of licensed financial advisors. Check this register to ensure the advisor you choose is properly licensed and has a good track record.

Utilising Government and Non-Profit Resources

Government and non-profit organisations offer free or low-cost financial counselling services. Financial Counselling Australia (FCA) is a key resource, providing access to qualified professionals who can help you manage financial difficulties. Their services are confidential and non-judgmental.

Australian Securities and Investments Commission (ASIC)

ASIC is the regulatory body overseeing financial advisors in Australia. They provide valuable resources to help you understand your rights and responsibilities when receiving financial advice. Their website offers tools to verify the credentials of financial advisors and information on what to expect from professional advice.

Financial Counselling Australia

FCA is a national body representing financial counsellors. They offer resources to find qualified financial counsellors who can provide free, independent advice. Their website is a great starting point to understand your options and get the support you need.

Managing your finances effectively involves understanding when to seek professional advice, the benefits of doing so, and utilising reputable resources such as ASIC and Financial Counselling Australia. Professional advisors and counsellors offer tailored guidance to help you achieve financial stability and make informed decisions.

By leveraging these resources, you can ensure that your financial strategies are sound and tailored to your specific needs, ultimately leading to better financial health and security.