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

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 Rating Score Range Secured Personal Loan Rates
Excellent 800-1200 7.88% - 16.99%
Very Good 740-799 13.13% - 13.18%
Good 670-739 13.13% - 13.18%
Average 580-669 13.13% - 15.76%
Below Average 0-579 15.71% - 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 score Interest rate Monthly repayments Total repayments
Excellent score 7.88% $202 $12,131
Below average 18.82 $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.

*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.

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Fact Checked -

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

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Learn more about credit score

Does borrowing money affect credit score?

Whether it’s through a home loan, a personal loan, or a credit card, borrowing money will affect your credit score. Taking on a home loan or a credit card may have a positive impact on your score, but too many loan applications can bring your credit score down.  

Every time you apply for credit, an inquiry is performed against your name. Too many inquiries can reflect negatively on your credit report, and if your loan application is rejected it will negatively impact your credit score.

How you handle your debt can also make a big difference. As long as you make timely payments you may be able to improve your credit score and overall creditworthiness. However, any missed or delayed payments will likely result in a negative impact on your credit score.

What are some advantages of a good credit score?

You should know about the advantages of credit score improvement as there are many occasions when having a good score is helpful. If your credit score is categorised as good, very good, or excellent, it can indicate you have strong borrowing power. This may encourage lenders to give you special discounts on interest rates and other loan terms. You may also find it easier to get approved for a credit card or a property rental. You can also try to negotiate terms using your superior credit score as leverage.

A high credit score indicates that you are financially responsible, but it requires you to be disciplined. If you currently have a good credit score, you still need to remember not to apply too often for credit cards or loans as these can quickly pull down your score. On the one hand, you may have better access to credit, but your good financial habits mean that you may not need to access this credit. Having some credit products can help build up your credit report, and therefore your credit score. You would just need to keep the debt and limits to a minimum and pay the bills on time. It’s never advisable to take out credit that you can’t afford to pay as it negatively impacts your credit history.  Even if you have a good credit score, you can always improve it further.

What is a good credit score?

Across Australia's major credit score providers, Experian and Equifax, there are five tiers, ranging from "below average" to "fair" to "good", "very good", and "excellent", with your score designating where you sit. As the tiers suggest, an Experian credit score between 625 and 699, and an Equifax credit score between 622 and 725, is technically considered to be in the range of "good". Anything above this is even better.

However, lenders will typically favour the borrowers with the highest credit scores which means that applicants with a "good" credit score may not be offered an interest rate as competitive as one offered to a borrower with a "very good" or “excellent” credit score.

Does a credit score check impact your credit score?

You may have heard that when a bank or lender performs a credit check, that it can impact credit score. But checking your own credit score isn't the same, and won't affect your credit score in the same way.

There are two types of credit checks that can be recorded in your credit history: hard credit checks and soft credit checks.

Hard credit checks occur when you apply to borrow money from a bank or lender, such as when you apply for a credit card or loan. A soft credit checks occur when your credit file is accessed outside of applications to borrow money, such as when you check your own credit score or credit history.

Checking your credit score is a request for information and not an application to borrow money, so it should not affect a lender’s decision to accept or decline your credit applications. As such, it's a soft credit check, and is unlikely to affect your credit score, positively or negatively.

 

How does my credit score affect the interest rate offered by lenders?

When you apply for a loan, lenders will typically access your credit history. By studying your credit report, they can not only estimate whether you are a reliable borrower, but also calculate the maximum amount you can borrow and repay completely before the loan term expires. Your credit report can also tell lenders about the other kinds of debt you’ve taken and whether you earn enough to make additional repayments. 

If you don’t have too much outstanding debt, or if you’re managing your current level of debt well, you’re more likely to have a higher credit score. For some credit products, lenders usually offer a lower interest rate for applicants with a fair credit score. If they don’t, you can always try to negotiate it, given your higher creditworthiness. You should remember that asking for a lower interest rate may not affect your credit score, but applying for the loan certainly has an impact.  

Why should I check my credit score annually?

You may not need to get your free credit rating every year, but it can help you stay informed. A yearly free credit report can help Australians keep track of the impact of various financial transactions on their credit score.

Your credit score helps inform financial organisations, particularly lenders, about the sort of payer you are. Depending on how you've paid down debt in the past, it will have affected your credit score in various ways. In Australia, the inclusion of Comprehensive Credit Reporting (CCR) means that you can find out which transactions affect your credit score positively, as well those that have a negative impact.

Because of this, you may want to consider getting a free credit report once a year irrespective of whether you’re planning to apply for a loan or take on other debt. Checking your credit report can tell you if there are errors in your credit file, which affect your credit score and need to be corrected.

What if your credit score has dropped for no reason

The importance of checking your credit score regularly is hard to overstate as the changes may not be as relevant to your life, and there may be the occasional error, but what should you do if it drops for no reason?

Credit reporting agencies calculate your credit score based on the information they receive from lenders, banks, credit card providers and utility companies, among others. This report takes into account both the credit enquiries these companies make, as well as your payment history with them, and may include other factors. But because some reports may come in at different times, delays can appear like drops. 

Suppose you missed paying a bill while on holidays and the supplier couldn’t reach you, or something like it -- in this instance, the provider may report the default to the credit reporting agency, which can cause your credit score to fall when the credit reporting agency eventually sees the information. Because of an obvious delay, the drop can seem random.

Regularly checking your credit score and the transactions that have appeared can provide some understanding as to why a credit score drop might have occurred, and even provide some understanding as to how you can fix the drop, improving your credit score in the process. 

Do landlords check credit scores?

For landlords, credit score checks can tell if a potential tenant has a history of delayed or missed rent payments. Usually, a poor record of repayments is likely to result in a low credit score. Also, your credit history may include information from tenancy databases such as the number of times landlords have inquired about your credit score. 

If there are too many inquiries within a short time, landlords may conclude that you have had issues renting in the past.  However, there is no rule as to when landlords check your credit score. Some might check every time they receive a tenant’s application. In some cases, landlords may even rent out their property to tenants with a poor credit history if they can submit additional documents or sufficiently explain their situation and how they are trying to address it.

 What credit score do landlords look for?

Landlords may look for issues relating to repayment rather than a specific credit score, although a low credit score probably suggests that you’ve had repayment issues. In general, if your credit score is categorised good, very good, or excellent - which corresponds to an Equifax credit score range of 622 - 1,200, landlords may not scrutinise your credit history too closely.

How regularly does your credit score change?

There are plenty of things that can affect your credit score, but when they'll impact it can vary wildly, and often depend on when the information has been passed on.

Every credit enquiry is noted on your credit file, and this impacts your credit score. Thanks to Comprehensive Credit Reporting (CCR), it means you both positive and negative transactions can impact your score, but so, too, can the frequency. For instance, if you apply too often for credit cards or apply with multiple lenders for a home loan and aren't successful, you may see a decline. 

How long this information take to pass on is an important question, but the length of time often depends on the credit reporting agency. Some transactions can take a small amount of time, while others take much longer. For that reason, it's important to check your credit history regularly so you can be more aware of what your credit score looks like, and if you need to correct any of the statements made on it. 

Does breaking a lease affect your credit score?

When you sign a lease, you’re agreeing to pay rent for a certain period. But what happens in case you need to break the lease midway? Does breaking a lease affect your credit score? 

If you’re planning to break a lease early, you might be required to give a certain amount of notice, pay two months' rent and an early termination fee, or you should be willing to forfeit your security deposit.

If you’re able to pay all dues before moving out, breaking the lease is unlikely to affect your credit score. However, if you leave without paying, your landlord could use a collection agency to collect any unpaid rent. Your landlord could even sue you, and if you lose, you may have to pay the dues and court costs. While landlords typically don’t report unpaid rent to credit bureaus, there’s a possibility that a collection agency will report it. Collection mentions can stay on your report for several years and may affect your credit score.

Furthermore, breaking a lease could create issues when you're looking to rent in the future. A future landlord could contact previous landlords or check your rental history, and any mention of a broken lease could make you appear as a high-risk tenant, putting the rental application at risk.

Can I check my credit score without a driver's license?

In Australia, your driver’s license is the preferred identification document for credit reporting agencies. This means you may not be able to confirm your identity using another document, such as a proof-of-age card. You may have genuine reasons like concerns over identity theft for not wanting to provide your driver’s license number. Unfortunately, most credit bureaus won’t allow people to check their credit score without a driver’s license. 

If you don’t have a driver’s license, there’s a good chance you haven’t applied for credit in the past and don’t have a credit score at all. In case you are concerned about identity theft, credit reporting agencies can offer you paid packages that include insurance against identity theft. Such packages may also include monthly credit score checks or alerts whenever your score is updated.

Does home loan pre-approval affect credit score?

Home loan pre-approval can give you a better idea of the amount you can spend when buying a property. It can also tell you about the steps you need to take to finalise your home loan and receiving the funds. Depending on how you approach a lender, pre-approval could include a credit inquiry which does affect your credit score. Some lenders, however, may offer an online pre-approval which is faster and doesn’t involve a credit history check. An online pre-approval may only consider your financial capacity and offer suggestions on how to prepare yourself to take a home loan.

Most lenders, however, will likely prefer to make a full assessment of your financial situation by requesting a credit report in addition to your bank statements and tax returns. Such a credit inquiry, sometimes called a hard pull, is usually recorded on your credit file and can therefore affect your credit score. If you approach several lenders and all of them initiate credit inquiries, this will impact your credit score negatively. Sometimes credit reporting agencies make an exception in terms of including multiple credit inquiries if they are made within a certain period. It would still be best to avoid making multiple applications with different lenders.

Why your credit score may differ between Experian and Equifax

Two of Australia's biggest credit reporting bureaus are Experian and Equifax, and while they both do the same thing, it’s not uncommon to find that your credit score can differ significantly.

Firstly, Experian and Equifax each have their own credit reporting algorithms to interpret and quantify your personal credit history. That means that while they do the same sort of thing -- credit tracking and reporting -- they may not handle it in the same way. Your credit history may therefore be similar, but not identical between Experian and Equifax.

While neither reveals exactly how they work, each also likely work in different time frames, which means your credit history may be viewed differently between the two. One could look at the most recent, while another might be weeks apart. For this reason, scores can vary.

Finally, there are different scales at which they work, and depending on the types of transactions your credit history has seen, this may impact the overall result slightly different, thus making the scores different. 

Do you need a credit score to rent a property?

A credit score is used by banks and lenders to understand your financial health and wellbeing, but you may not be aware that it's used as a way for landlords to understand whether or not it's risky to get into a financial relationship with you.

When you’re looking to rent a property, your landlord may check your credit history to get a sense of your capability to pay rent in a timely fashion. Landlors may look at your history of repaying debts, and this as a benchmark to understand the likelihood of you paying your rent on time, or not.