What factors affect your credit score?

What factors affect your credit score?

Whether you’re applying for a mortgage, a loan, a credit card, a job or even an apartment to rent, your credit score could be one of the key things that determines your eligibility.

Although most lenders have an internal credit scoring system of their own, they will refer to your credit score while evaluating your application. So, it is essential to understand how your credit score is calculated, the factors that influence it, and what a good credit score is.

How is your credit score calculated?

A credit bureau, or credit rating agency, is responsible for calculating your credit score. In Australia, the three most reputed rating agencies which examine your credit history to determine your credit score are Experian, Illion, and Equifax.

Earlier, credit scores in Australia reflected only adverse credit events. But with the introduction of the comprehensive credit reporting (CCR) in 2014, they may soon provide a more balanced picture of your credit history, also reflecting positive financial behaviour such as on-time repayment.

Each credit rating agency employs its own algorithm to calculate credit scores, so each of them is likely to assign a slightly different score for the same individual. But all three of them consider some common factors such as:

  • The length of your credit file;
  • What accounts you have opened and closed, including bank accounts, phone plans and utilities bills;
  • The type and amount of credit you have applied for in the past;
  • The type of lenders you approached;
  • The number of applications and any rejections;
  • Your repayment history;
  • Negative credit listings, if any; and
  • Court writs, default judgments or bankruptcies if any.

What is a good credit score?

Although different agencies also categorise credit scores differently, as seen in the table below, a figure of 700 or more is considered in a healthy range.

Rating Equifax score Experian score Illion score
Excellent 833-1200 800-1000 800-100
Very Good 726-832 700-799 700-799
Average 622-725 625-699 500-699
Fair 510-621 550-624 300-499
Low 0-509 0-549 0-299

What should I do to get a good credit score?

Once you know the factors that affect your credit score, it becomes relatively easier to avoid financial decisions that may impact your score negatively.

Some of the things that you need to avoid include:

  • Frequently missing payment due dates
  • Applying for too many credit cards
  • Closing credit accounts that have a good repayment history
  • Not checking your credit report regularly and correcting errors, if any
  • Using the entire credit limit available to you

Further, if you’re a young adult Australian who has not yet developed a lengthy credit history, this is understandable. Keeping the above in mind, you may be able to begin building a good credit score by having your own phone plan separate to your parents, or getting your name on an energy or gas bill.

Are there other factors that can affect your credit score?

Some of the common queries about what affects your credit score are:

  • Do balance transfers hurt your credit score?

Several credit cards offer a balance transfer facility that would allow you to pay off your outstanding at a lower interest rate than what your current credit card does. If this helps you consolidate your debts and help with repayment, it can actually have a positive effect on your credit score. But if you do this too frequently, or miss payment due dates, it can lower your credit score.

  • Does a credit card money transfer affect your credit score?

Transferring money from your credit card to a debit card or a transaction account does not show up on your credit report. So it may not affect your credit score directly. But most of the banks that allow money transfers from a credit card treat it as a cash advance, so it attracts the same fees and interest rates. Since these are usually higher than normal, it could affect your repayment plan, resulting in you missing payments, which could affect your credit score.

  • Do medical bills affect your credit score?

Just like credit card money transfers, medical bills by themselves do not affect your credit score, unless you default on the payment and the hospital or healthcare provider then transfers your debt to a collection agency. It can then get reported to a credit bureau and will affect your credit score negatively.

  • Is not having a credit card bad for your credit score?

Not having a credit card by itself may not harm your credit score, provided you have some other debt like a loan or a mortgage. While this may seem counterintuitive, not having an active line of credit may be like having a blank credit history. So lenders have less ways of knowing whether you’re a responsible borrower, and this can lower your credit score.

  • Do late payments on your phone and utility bills hurt your credit score?

Since telecom and utility service providers aren’t licensed credit providers, they cannot disclose your repayment history unless you default on a payment. If you do they can report it to a credit rating agency and this will hurt your credit score. For late payment to qualify as a default, the amount due has to be more than $150, and it has to be due for more than 60 days. These companies also need to have taken reasonable effort to contact you and recover the outstanding.

  • Does getting rejected for a loan or credit card affect your credit score?

Every application for a loan or credit card is registered on your credit report irrespective of the outcome. If you are rejected when applying for a financial product, such as a credit card or a home loan, this will reflect negatively on your credit report. Ensure you've done your research around that financial institutions’ eligibility criteria before applying for any product.

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Fact Checked -

This article was reviewed by Personal Finance Editor Alex Ritchie 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.

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 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.

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 a debt collector affect your credit score?

When a creditor is unable to contact you by phone or by sending you a formal notice in regards to outstanding debt, they will often outsource the job to a debt collector. The debt collector can try to reach you by phone, or they can attempt to contact you face to face. If they cannot get through to you by either method, they can only report back to the creditor but not directly report a payment default to the credit rating agency. So, can debt collectors affect your credit score? No, they cannot do so directly.

However, if you owe money, you have an obligation to return it or communicate your difficulty in doing so to the creditor as well as to any involved debt collector. If they cannot contact you, they can report a serious credit infringement against you, which may affect your credit score for many years. Creditors can also take the legal route, and a court judgment against you can also severely impact your credit score.

You should remember that debt collectors need to abide by specific rules and cannot harass you by repeatedly calling or visiting you, or by threatening to confiscate your possessions if you don’t pay up. Similarly, they cannot threaten to file a default against you, especially with a credit bureau.

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.  

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.

 

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.

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 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.

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.

What can impact my credit score?

Your credit score isn't set in stone and can change with every financial decision and action you take. While you checking your score is a soft check and won't impact the result, payments and other actions can affect the score. 

The very things that can impact your credit score include your payment history (late or on time), the age and type of credit you have and owe, your debt balance (both current and delinquent, if any), recent payment behaviour, the credit available to you presently, and if you have any court judgements or actions resulting form bankruptcy.

Australia's Comprehensive Credit Reporting (CCR) also tracks your positive payments, and allows your credit score to be impacted positively, as well. 

Where can I check my credit report for free?

While you can get a free credit report in multiple ways, RateCity's own credit checking system allows you to find your score from two credit history systems, Experian and Equifax. 

When you request your free credit report, you'll likely need to supply some personal information, such as your name, contact details, and a personal identification, such as a drivers license number or another form of identification. 

Not only does a credit report show credit score, but it usually often contains positive and negative credit transactions covering the past five years of payments.