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The difference between a good and a bad credit score in personal loans

Alex Ritchie avatar
Alex Ritchie
- 7 min read
The difference between a good and a bad credit score in personal loans

When it comes to getting a personal loan, your credit score plays one of the most important roles. Personal loan providers are known to assess a borrowers’ eligibility for loan approval and determine their offered interest rate, based on their credit score (among other factors).

But you may be curious as to exactly how different personal loan interest rates are based on credit scores in Australia.

Why your credit score matters

A credit score is a number given to an individual by a credit reporting bureau, based off of your credit history, that helps determine your creditworthiness. Essentially, it helps a bank to see if you’re likely to, say, pay off a loan or make credit card payments on time, based off of your past behaviour with credit products and bills – both positive and negative.

It is a key component to a credit provider’s eligibility criteria when deciding whether to approve someone for a financial product and determine their interest rate.

There are two major credit reporting bureaus in Australia: Experian and Equifax. Both divide their credit scoring systems into five tiers:

  1. Excellent
  2. Very Good
  3. Good
  4. Fair
  5. Below Average

While both credit reporting bureaus may grade your score on a different internal numerical scale, they will always fit into the above five categories.

What this means for a personal loan application is that whether or not you have a ‘Good’ to ‘Excellent’ credit score may mean the difference in not only being approved for a loan, but borrowing the amount you want and getting a competitive interest rate.

How your credit score impacts your personal loan offering

Now you understand where your credit score sits and why that matters, let’s explore further how your credit score may impact the interest rate you’re offered.

Typically, personal loan providers will not disclose detailed breakdowns of their risk-based pricing. But RateCity reached out to a variety of providers and obtained the following data to create a guide around how your credit score may impact the interest rate you’re offered.

Personal loan interest rate you may be offered based on your credit score

Credit RatingScore RangeSecured Personal Loan Rates
Excellent800-12007.88% - 16.99%
Very Good740-79913.13% - 13.18%
Good670-73913.13% - 13.18%
Average580-66913.13% - 15.76%
Below Average0-57915.71% - 18.82%

Source: RateCity.com.au. Data based off of Equifax credit score range. Figures provided by 11 personal loan lenders. See below for disclaimers*

Let’s say you’re looking to borrow $10,000 on a secured personal loan over 5 years for a honeymoon. What would the difference be in the interest rate a personal loan provider may offer you, depending on your credit score?

Just based off of the above table, a borrower with a Below Average credit score may be approved for a $10,000 secured personal loan but find themselves paying an interest rate of 18.82 per cent. However, a borrower with an Excellent credit score may only be paying 7.88 per cent.

Difference in personal loan repayments on $10k loan based on credit score

Credit scoreInterest rateMonthly repaymentsTotal repayments
Excellent score7.88%$202$12,131
Below average18.82$258$15,505

Note: Figures based off of hypothetical example, does not factor in fees.

The borrower with an Excellent credit score is likely to save thousands of dollars more in interest repayments over the life of the loan by having a lower interest rate. In this example, the borrower with a below average credit score paid $3,374 more in interest.

As an individual with an excellent credit score has showcased a high level of creditworthiness, a personal loan provider will assess that there is less risk in lending them this $10,000 amount. Due to the lack of risk, the provider charges a lower interest rate as there is less chance that the borrower will default on the loan.

By charging a higher interest rate for those with below average credit scores, the personal loan provider can ensure that it recoups some of the borrowed funds, as there is a higher chance the borrower will default.

Keep in mind that the actual interest rate offered may differ from those listed in the above table and depends on your personal financial situation, such as income and employment status, as well as credit score.

How can I keep a personal loan rate low?

Would-be borrowers who do not have excellent credit scores may be wondering how they can aim to keep a personal loan interest rate low.

Improving a credit score can take a number of months, if not years, but there are some ways a borrower with a less-than-stellar credit score may be able to boost their score and find a competitive personal loan, if they’re willing to put in the work:

  • Compare your personal loan options. It’s no secret that individuals who stick with the same bank they’ve been with their whole lives can be stung with a ‘loyalty tax’. That’s why it can literally pay to compare personal loan options before applying. Comparison tools, like tables and calculators, may help you to view a variety of loan options based off of your specific needs, filter down your options then compare potential repayments to find the most competitive personal loan for you.
  • Check your report for errors. Something you can do immediately to boost your credit score is to carefully review your credit history for errors. It’s not uncommon to find that someone with the same name as you, or a family member, has had their credit history applied to your report. Do your due diligence and report any errors to the credit reporting bureau.
  • Pay your bills on time. Thanks to Comprehensive Credit Reporting, the positive components of your credit history is now factored into your credit report. Waiting for a default to leave your credit file can take six years, but you can work to improve your score in the meantime by focusing on positive events like this. Set reminders in your calendar or set up direct debits for bills – including utilities and your phone bill - to ensure that you’re never late for a payment. And if you know you may make a late bill payment, reach out to the provider ahead of time and they should be able to work with you to establish a payment plan or hardship support.
  • Wait 12 months to apply. As mentioned earlier, there’s more to a personal loan application than your credit score. Personal loan providers often favour borrowers who have lengthy employment histories with the one company, as it showcases a level of financial stability. This means that those who have been employed full time with one company for at least 12 months are more likely to be approved for a loan and may receive a more competitive interest rate.

Disclaimer

This article is over two years old, last updated on March 22, 2021. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent credit score articles.

*These estimated ranges are for illustrative purposes only. Each lender will use different criteria to adjust its interest rates based on your credit score. No data or content published by RateCity is to be relied upon for any financial decisions. RateCity strongly recommends that you perform your own independent enquiries before making any financial decisions. We cannot accept responsibility for any loss or inconvenience caused by reliance on the material contained here.

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.