Does your credit score directly relate to how much money you can take out?

If you’re applying for credit products, such as a credit card, personal loan or a home loan, you may be wondering how much your credit score comes into play. But did you know your credit score may impact the amount of money you’re approved for?

How credit scores impact the credit you can access

Your credit score is a number that showcases to a bank or loan issuer how reliable you are as a borrower. It is an indicator of your riskiness as a borrower and helps a bank or issuer determine whether to lend you money and, for some loans, what interest rate to offer you.

Credit bureaus, such as Equifax, will categorise your credit score into five tiers:

1. Below average
2. Fair
3. Good
4. Very good
5. Excellent

Your credit score, and the category it is placed into, is determined by positive and negative credit events.

A very good or excellent credit score shows a good history of credit repayments and managing debt.

A below average credit score may indicate that you have trouble meeting your credit repayments on time or have struggled with debt, defaults or even bankruptcy in the past.

These positive or negative credit events play a major role in determining your credit score and the amount of money you can borrow from a bank.

When it comes to applying for a credit card or a loan, your credit score will directly impact not only the amount of money you can borrow or your credit limit, but also whether you’ll be approved full stop.

Eligibility criteria and how it impacts you

Credit providers cannot just lend out money to anyone who applies. Credit licensees must comply with responsible lending conduct obligations as set by Australian regulatory bodies like ASIC and the ACCC.

According to ASIC’s website: “The key concept is that credit licensees must not enter into a credit contract with a consumer, suggest a credit contract to a consumer or assist a consumer to apply for a credit contract if the credit contract is unsuitable for the consumer.”

Put simply, responsible lending is put in place to protect you from taking on debt you cannot reasonably service and falling into financial hardship. This is why you have to meet a set of eligibility criteria when you apply for any financial product.

This typically includes:

• Being over 18 years of age
• An Australian citizen or permanent resident
• Meeting minimum annual income requirements
• Meeting employment requirementS
• Having a suitable credit rating

When you apply for a credit product, you’ll need to prove the above by providing anything from bank statements, payslips, employment details, information on any existing debts or loans and your tax file number.

The credit provider will also run a hard credit enquiry on your name to discover your credit history and score.

• Note: This hard enquiry will show up in your credit history. It’s crucial you do not apply for any financial product without ensuring you can meet the provider’s eligibility criteria.

Now your application has been approved, the provider will need to determine your interest rate (if applying for a loan) and/or your credit limit (if applying for a credit card).

How does my credit score affect the money I can take out?

Put simply, the higher your credit score, the more responsible and trustworthy you are as a borrower.

It’s for this reason that lenders will typically approve borrowers with a higher credit score for a higher credit limit, a bigger loan, or a lower interest rate.

This is because they have previously demonstrated (as evidenced in their credit report) they are not a risky borrower and can pay on time. This means the lender will be more willing to lend to them.

While having a bad credit score doesn’t rule someone out from securing a loan, it could mean a higher interest rate or less favourable terms.

Before applying for any loan or credit, find out your credit score and if you need to work on improving it.

Not sure of your credit score, you can check it, for free, here.