Your guide to credit scores
Find out what makes up a credit score, how it affects your finances and how you can improve your score
What is my credit score?
Your credit score is a numeric measure, usually between 0 and 1000, that tells banks, credit card companies, and loan agencies what your history has been like with paying your bills and debts.
Credit scores are a good indicator of whether lenders can trust you to repay a loan or debt in the future, and base your score on your credit history or experience of repaying loans or settling debts. Australians can typically check their credit score online for free by providing a few personal details. To understand how your credit rating is computed, you may be able to access your credit report, which can also tell you about the incidents affecting your score.
Credit rating bureaus categorise credit scores in five tiers ranging from “below average” to “excellent”. Your credit rating can fall into any of these tiers based on the positive and negative incidents affecting it. Positive incidents include borrowing money less often and repaying your credit card debt, while negative events include paying only the minimum amount due on your credit card or defaulting on a loan payment. Other factors that affect your credit score may include the duration you have occupied your current residence, the length of time you have been employed, and the depth of your credit history.
If you register a series of positive incidents, credit rating bureaus are likely to view your credit profile more favourably, resulting in a higher credit rating overall. Lenders reviewing your loan or credit applications may consider you a less risky customer if you have a high credit score, and your credit history is sufficiently rich yet without controversial events. On the other hand, a low credit score reflects more negative incidents and may make it difficult for you to be seen in a favourable light, affecting your loan and credit applications. From a lender’s perspective, an average or below-average credit rating reflects your likelihood to incur further debt. Checking your credit score, however, isn’t considered either a positive or a negative event.
While your credit score indicates how successfully you manage debt, it can change over time. This means you may want to take actions to remedy a bad credit rating, one of the reasons to consider checking your credit score periodically.
Sometimes, a low credit score may not be your fault at all, as incorrectly added personal details or a misreported debt can affect your credit rating. Requesting a credit rating bureau to rectify such errors can help fix your credit score, though credit scores can vary between the credit reporting bureaus.
A genuinely low credit score isn’t the end of the world, but knowing why can help you find out how to improve your credit rating, much like how knowing if you don't have a credit score can help put you on the right path to getting one.
Understand credit files and credit scores
Your credit file is a synopsis of your credit history, including:
- your credit details
- credit taken in the last five years
- delayed or default payments
- repayment history
- any case of bankruptcy
- a list of credit applications (including unapproved credit applications)
- your personal details
A credit score is a numerical digit that helps you understand where you stand as a borrower, while a credit file is the overall summary of your credit history. Being a numerical representation of your borrowing capacity, your credit score is used by banks and lenders throughout the country to get a snapshot of your financial status. Credit scores can also provide reassurance to borrowers before they approach a lender for a new loan or credit card.
Your credit score can be accessed by lenders, banks and utility companies. A decent credit score indicates that you are likely to pay back your loans, credit cards and bills. One should strive to maintain a good credit score to be considered a good risk to a lender.
How is your credit score calculated?
In Australia, comprehensive credit reporting requirements oblige banks and other credit lenders to report your financial status and activities to credit rating bureaus. Since 2014, these reports include both positive changes to your financial profile as well as negative incidents, whereas previously, it was mostly negative.
Credit rating bureaus then use this information to build your credit report and compute your credit rating. Note that there must be information available about you to have a credit score. Never borrowing money doesn’t automatically imply that your credit score is going to be high; as far as your lender is concerned, your borrowing behaviour is unknown if you’ve never taken on debt of any kind.
When calculating your credit score, credit rating bureaus may assess your bank and credit card accounts for any past issues, including those that may have caused you to open further accounts, often to determine why you did so. As such, the history and frequency of your recent credit transactions may also be examined to understand your financial profile. Again, too many instances of borrowing money can reflect uncertainty on your part in estimating how much money you need, which may make lenders feel you pose a higher risk.
Another important factor in gauging your creditworthiness is your repayment history: lenders need to know the likelihood of you missing payment deadlines or being unable to pay the amount due within a reasonable time. If you own one or more credit cards, how often you pay only the minimum repayment can affect your credit score. Using a credit card with a moderate borrowing limit, not spending the full limit, and repaying the card debt entirely will likely improve your credit rating, while defaulting on the card or not making payments, even for brief periods, can have negative consequences.
Your credit score can also be impacted by your utility and phone bills. Every bill of significant value that you need to pay periodically can affect your credit rating and can be included in your credit history.
To get a direct understanding of how specific positive and negative incidents affect your credit rating, consider reaching out to any of the Australian credit reporting bureaus and access your credit report. You may then be able to use this information when applying for a loan to negotiate better terms. For instance, if your credit report reflects your history of making regular repayments, you may be able to convince your lender to offer you easier repayment options. However, just because you can successfully take on credit doesn’t mean you should go around on a borrowing spree, as a sudden spike in credit transactions may adversely affect your credit rating.
What credit score is considered good by Australian credit score providers?
Three credit reporting bureaus operate in Australia: Equifax, Experian, and Illion. Each compiles credit reports based on information from various, differing sources, and these bureaus are required by law to give you free access to your credit report once every twelve months.
Each bureau uses a different scale to compute credit scores, and no two is alike. Equifax, for example, uses a scale from 0 to 1,200 while Experian’s upper limit is 999 and Illion’s, 1,000. All three bureaus also use a five-tier credit rating scale. Depending on the bureau, your credit score may fall into a different tier altogether. The classification utilised by Equifax illustrates this point.
|Tier||Credit Score Range||Description|
|1||833 - 1,200||Excellent|
|2||726 - 832||Very Good|
|3||622 - 725||Good|
|4||510 - 621||Average|
|5||300 - 509||Below Average|
Based on the tier your credit score falls into, you can gauge how many positive or negative incidents you’ve experienced, and what you may need to do to improve your credit score.
If your credit score is above 833, for instance, as per Equifax you are five times less likely to default on a loan or a debt compared to the average credit-scored population. It is also unlikely that you will engage in a negative financial transaction over the next twelve months. Similarly, someone with a “very good” credit score is half as likely as others to register a negative transaction. If you have a tier one credit score, you will be able to access credit more competitively and at a comparatively lower cost.
Credit reporting bureaus usually describe people with a higher credit score as being more financially responsible and having a higher ability to manage debt. Conversely, those with lower credit scores may be seen as more disorganised and less stable in their financial behaviour, and therefore more likely to default on debt repayments. If your credit score falls under one of the lower tiers, the bureau will likely check your negative transactions more thoroughly.
Every time you conduct a credit transaction, the rating bureau updates your credit score to reflect the impact of that transaction. This doesn’t mean you should keep checking your credit score after each transaction, however, if you're concerned, a regular check may provide you with an understanding as to what is going on. You may need to consult a financial advisor in case you're unsure of just how to improve your credit score, as they can guide you on planning the necessary transactions, and understanding your finances.
How can you improve your credit score?
When you review your credit report, you should examine every aspect of it in detail, starting with your details. If any of your details, including your name and your driving license number, are recorded incorrectly, someone else’s financial transactions can get registered in your credit report.
Consider checking the most recently recorded financial transactions to verify their accuracy. Explore whether the number of credit applications is mentioned correctly, or if there is a wrongly included debt marked against your name. An error-free credit report can be useful in understanding the impact of each credit transaction, and in gauging if you need to take steps to improve your credit score.
In case you need to fix your credit rating, one potentially positive move may be paying down any substantive accounts and reducing the number of credit accounts you have. The transactions already recorded in your credit report may guide you in identifying these accounts, or at least suggesting if you need to be more careful in applying for fresh credit. You can also check if you have simultaneously submitted loan applications to several lenders and if you have missed any payment deadlines to set yourself reminders to avoid doing so in the future.
Changing your credit history may not be possible, but you can certainly work on it with guidance. In Australia, there are several government agencies and community organisations that provide such counselling services for free. You can also discuss how to improve your credit score with an existing lender, especially if you are going through financial difficulties and struggling to keep up with repayments on time. If you feel stressed by being unable to make payments on time, you may face harassment from lenders, which can, in turn, affect your ability to take prudent financial decisions and further affect your credit history.
However, be careful about approaching agencies that claim they can repair your credit history or clear all previously recorded negative transactions. Instead, consider approaching any of the credit reporting bureaus directly to access and understand your credit report.
Remember that a credit score can be low for many reasons, such as a lack of financial history. Even if past negative transactions continue to be reported in your credit report, accumulating positive transactions can mitigate their impact. You may want to set up annual milestones to gauge if the steps you're taking are moving your credit score in the right direction.