What is the perfect credit score and how do I get it?

What is the perfect credit score and how do I get it?

Credit scores are calculated by private credit reporting bodies, so the perfect credit score varies from organisation to organisation.

There are three companies in Australia that calculate credit scores:

  • Equifax (perfect score = 1,200)
  • Experian (perfect score = 999)
  • Illion (perfect score = 1,000)

Each of these credit reporting bureaus uses a scoring system with five different tiers:

Tier Equifax Experian Illion
1 Excellent = 833 to 1,200 Excellent = 961 to 999 High end = 800 to 1,000
2 Very good = 726 to 832 Good = 881 to 960 Great = 700 to 799
3 Good = 622 to 725 Fair = 721 to 880 Average = 500 to 699
4 Average = 621 to 510 Poor = 561 to 720 Room to improve = 300 to 499
5 Below average = 0 to 509 Very poor = 0 to 560 Low = 0 to 299

Case study

John wanted to get a credit card for his overseas holiday, which was due to start in 15 days. He was worried that his new card wouldn’t arrive in time, so he decided to maximise his chances by sending applications to six different banks. His plan was to use whichever card arrived first and to cancel the others when he returned from his holiday.

What John didn’t realise, though, was the damage this would do. That’s because his credit file now showed that he’d made six credit card applications in a hurry – just the sort of thing someone does if they’re bad at managing money. It didn’t matter that John cancelled the five extra cards when he got back home – the negative act remained part of his credit history.

istock_79305201_small5

How to get a good credit score

To understand how to get a good credit score, you first need to understand the thinking behind the system.

A credit score is a number that indicates how credit-worthy you are, based on your history of paying rent, phone bills, credit card bills, car loans – indeed, any sort of loan.

As a general rule, lenders believe that Australians with higher credit scores are less of a risk than those with lower credit scores. So they regard the first group as more desirable customers than the second.

Here is how lenders and other credit providers tend to assess Australians:

Higher credit score Lower credit score
Better track record of managing loans Worse track record of managing loans
More stable and responsible Less stable and responsible
More likely to repay a loan Less likely to repay a loan
More likely to have a loan approved Less likely to have a loan approved
More likely to qualify for the best deals Less likely to qualify for the best deals

If you want to get a good credit score, you need to establish a history of using credit responsibly. That means doing these three things:

  1. Limiting your number of credit applications (applying for one credit card is better than applying for five)
  2. Paying bills on time (aim to pay all your bills by the due date)
  3. Paying off loans (aim to make every repayment by the due date and to pay off the entire on schedule)

Australia has a system known as comprehensive credit reporting, which means that credit reporting bureaus weigh up both positive and negative acts when calculating your credit score. (Before comprehensive credit reporting was introduced, in 2014, only negative acts were considered.)

To get a tier-one credit score, you need the ratio of positive to negative to be as high as possible. That means:

  • Doing one positive act after another, over the long term
  • Minimising – or even eliminating – negative acts

Did you find this helpful? Why not share this article?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the ratecity.com.au Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy

Advertisement

Learn more about credit cards

How easy is it to get a credit card?

For most Australians, there are no great barriers to applying for and getting approved for a credit card. Here are some points that a lender will consider when assessing your credit card application.

Credit score: A bad credit score is not the be all and end all of your application, but it may stop you being approved for a higher credit limit. If your credit score is less than perfect, apply for the credit limit that you need, rather than the one you want.

Annual income: Most credit cards have minimum annual income requirements. Make sure you’re applying for a card where you meet the minimum.

Age & residency: You need to be at least 18 years old to apply for a credit card in Australia, and most require that you are an Australian citizen or permanent resident. However, there are some credit cards available to temporary residents.

Do you need a credit card to get a loan?

You do not need a credit card to get a loan, but you usually need to have a credit history. Without a credit history, a financial institution cannot assess your ‘credit worthiness’, or your capacity to pay off the loan.

If you don’t have a credit card, your credit history can reflect any record of paying off an asset. Without any credit credit history, you’re limited in the type of loans you can apply for. But you may be able to obtain a secured loan against an asset. For more information on improving your credit score, go here

What happens if I have a bad credit score?

If you have a bad credit score, you might encounter two main problems. First, the lower your credit score, the more likely you are to be rejected when you apply for a loan or any other credit product. Second, if your application is accepted, the less likely you are to qualify for the lowest interest rates.

Why should I check my credit rating?

There are two reasons you should check your credit rating: so you have a better understanding of your financial position, and so you can take action (if necessary) to improve your credit rating.

Lenders use credit ratings or credit scores to assess loan applications. The higher your score, the more likely you are to get approved, and the more likely you are to be charged lower interest rates and lower fees. Conversely, the lower your credit score, the less likely you are to get approved, and the more likely you are to be charged higher interest rates and higher fees.

How to get a credit card for the first time

A credit card can be a useful financial tool, provided you understand the risks and can meet repayment obligations.

If you’re a credit card first-timer, review your options. Think about what kind of credit card would suit your lifestyle, and compare providers by fees, perks and repayments.

Once you’ve selected a card, it’s time to apply. Credit card applications can generally be completed in store, online or over the phone.

When you apply for a credit card for the first time, you must meet age, residency and income requirements. As proof, you must also provide documentation such as bank account statements.

What is a balance transfer credit card?

A balance transfer credit card lets you transfer your debt balance from one credit card to another. A balance transfer credit card generally has a 0 per cent interest rate for a set period of time. When you roll your debt balance over to a new credit card, you’ll be able to take advantage of the interest-free period to pay your credit card debt off faster without accruing additional interest charges. If your application is approved, the provider will pay out your old credit card and transfer your debt balance over to the new card. 

What's the best credit card for rewards?

There is no one-size-fits-all best rewards credit card. It's best you research what type of rewards program you'd like, as well as the fees, interest rate and conditions associated with those types of cards before making a choice. 

Rewards credit cards can also come with high annual fees that may end up nullifying the rewards, so think how often you use the card to decide whether the benefits outweigh the extra cost for you. A card with a lower annual fee might require a lot of spending to get any useful rewards, while another card with a higher annual fee might need fewer purchases to get a reward. 

How many numbers are on a credit card?

The numbers on your credit card actually follow a universal standard which is used to identify specific functions. Each credit card has a different amount of numbers. Visa and Mastercard have 16, American Express has 15 and Diner’s Club has 14. 

The first number on a credit card always identifies what type of credit card it is. Visa cards start with a 4, whereas Mastercard starts with a 5 and American Express with a 3. The remainder of the digits represent the account number, including the last number which is used to verify that your credit card is actually valid. 

Credit cards also have additional verification numbers, which are mainly used when the card isn’t present for phone and online purchases. These are the three-digit numbers on the back of Visa and MasterCard or the four-digit numbers on the front of an American Express card.

How do credit cards work?

Think of credit cards as a short-term loan where you use the bank’s money to buy something up front and then pay for it later. Unlike a debit card which uses your own money to pay, a credit card essentially borrows the bank’s money to fund the purchase. When you apply for a credit card, the bank assesses your income and assigns you a credit limit based on what you can afford to pay back. At the end of each billing cycle, which is usually monthly, the bank will send you a statement showing the minimum amount you have to pay back, including any interest payable on the balance.

How to get money from a credit card

You can get money from a credit card, but generally it will cost you.

Withdrawing money from a credit card is called a cash advance, as it operates more as a loan than a simple cash withdrawal. Because it is a loan, you may be charged interest on your cash advance as soon as you make the withdrawal. Interest rates are also usually much higher for cash advances than standard credit card purchases.

In addition to the interest rate, you may also be charged a cash advance fee. This could be a flat rate, or a percentage of your total cash advance. If you are considering a cash advance, make sure to add up how much it will cost you before committing.

What should you do when you lose your credit card?

Losing your credit card is a serious situation, and could land you in financial trouble. Here is a simple guide detailing what to do when you lose your credit card.

Lock you card – Contact your provider and inform them about your lost credit card. From here lock, block or cancel your card.

Keep track of transactions – Look out for unauthorised credit card transactions. Most banks protect against fraudulent transactions.

Address recurring charges – If your card is linked to recurring charges (gym membership, rent, utilities), contact those businesses.

Check credit rate – To ensure you’re not the victim of identity theft, check your credit rating a month or two after you lose your credit card.

How long does it take to get a credit card?

There are a few stages you need to go through to get a credit card; each one takes a different length of time.

Applying for the card online, over the phone or in person is the fastest step. This usually takes around 15 minutes, provided you have all of your documents handy.

After submitting your application, it usually takes between one to 10 business days for the lender to assess your eligibility. Some lenders offer instant approval, although you will need to send supporting documents before it is official.

Once your application has been approved, expect to wait between one to 14 days to receive your card in the mail. Keep in mind that delays can happen during busy periods, such as if the lender has launched a special deal.

How do I apply for a credit card online?

How to get cash with just a credit card number

Banks and merchants usually will not allow you to access cash without a physical card, because doing so would open up opportunities for fraudulent activities. Even most non-cash credit card transactions (such as shopping online) require you to know the expiry date and CVV on your credit card in addition to the card number.

However, some banks offer cardless cash for transaction accounts. Using a secure app installed on your mobile phone, you can log onto an ATM and withdraw the money you need. This could be a practical and secure solution if you don’t have a card and need cash.