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Why are credit scores a thing?

Credit scores were developed in the USA in the 1950s, when two statisticians made correlations between which behaviours made a person a good credit risk and which made them a bad credit risk.  They distilled the information in credit reports into a number, which allowed for more objective forms of lending decisions.

 

Does checking my credit score bring it down?

This is a common misconception, but it is not true.  In the industry, checking your credit score is known as a “soft” enquiry that will not affect your score.  When you apply for credit and a lender checks your credit report, this is known as a “hard” enquiry, and may affect your score.

 

I know I’ve applied for a product, why can’t I see it on my credit report?

Not all financial institutions and credit providers submit data to every Credit Reporting Body (CRB).  Your credit provider may know enough to decide your application without making an enquiry to any of the CRBs.

There may also be a delay between an application with a credit provider and it then showing up on your credit file.

 

How will a payday loan affect my credit score?

A payday loan, also known as a ‘small amount loan’ is a loan of up to $2,000 with a term of 16 days to 1 year. They are often advertised as means to cover unexpected costs that need to be paid urgently.

Applying for any credit product can affect your credit score and payday loans are no different.  An application for a payday loan might be considered differently to other credit products when your credit score is being calculated by a CRB, and possibly result in a decrease.

Even if a payday loan did not affect your credit score, lenders are still able to see whether you have applied for one by looking at your credit file.  Some may not lend to you if you have any active payday accounts or have had any in a specific recent time.

Visit MoneySmart for more information on alternatives to payday loans.