What has the biggest impact on your credit score?

Whether applying for your first home loan or paying an energy bill, you’d be surprised just how many of your everyday financial decisions can impact your credit score.

So what exactly are credit reporting bureaus applying to your credit history and which event makes the biggest impact on your credit score?

How are credit scores calculated?

Generally speaking, your credit score is calculated based on the information in you credit report, which is provided by lenders or services providers and includes:

• Any money you have borrowed, including loans and credit cards
• Your repayment history
• Credit applications
• Defaults
• Bankruptcy
• Debt agreements

Based on this information, you are then given a credit score, which falls into a rating system - usually starting at ‘Poor’ for lower scores, and ending at ‘Excellent’ for higher scores.

There are three main credit bureaus in Australia: Equifax, Experian and Ilion. While they all grade events differently, we explore some of the most significant financial decisions and events that could help or hurt your credit score.

1. Paying your bills on time

It’s a no-brainer that providers prefer when customers pay their bills on time, and late payments can negatively impact your credit history.

Thanks to comprehensive credit reporting, your positive credit history is also reflected on your credit report, so paying your bills on time is more important than ever if you’re trying to improve your credit score.

2. Multiple credit applications

If you apply for credit products such as credit cards, home loans, car loans or personal loans, and your application is rejected, this can negatively impact your credit score and act as a red flag to lenders assessing any future applications you might make.

However, if you’re making multiple applications in hope one will be approved, this is also recorded on your credit report. Credit providers can see this and may be less likely to approve you for any products.

Try to only apply for one credit product at a time and ensure you’re providing correct information to meet the provider’s eligibility criteria. The last thing you want is multiple rejected credit applications in your credit history.

3. Maxing out your credit card

If you continuously fail to make your credit card repayments on time, or apply for too great a credit limit, this may lower your credit score. Try to limit your card spending where possible and avoid taking on too much debt.

4. Not paying bills on time

While paying bills on time can improve your credit score, missing bill payments and being late with loans can negatively impact it. This doesn’t just include credit card bills or home loan repayments, but potentially utility bill payments and mobile phone contracts.

A late payment is classified as more than 14 days past the due date and may be recorded in your credit history for up to 2 years.

If you’re having trouble paying your bills and need a little breathing room, speak to the provider immediately as they should be able to negotiate a payment plan for you. You may also be able to move onto a hardship plan - but it’s worth noting that this will be recorded on your credit report, but will not impact your credit score calculations.

5. Defaults

A default may be listed if a payment of over $150 is more than 60 days overdue. The provider and/or a debt collector will have to have taken steps to collect part or all of your payment beforehand, so it should not come as a shock to the individual incurring a default. A default will stay on your credit report for five years.

6. Bankruptcy

One of the bigger influences on a credit score are the more severe events, such as bankruptcy. If you are severely struggling to repay your debts, and have exhausted all other options available to you, entering the legal process of filing for bankruptcy may be required.

While doing this can release you from some of your debts, it will have a significant impact on your credit history, will require your name going on a public register, and could impact any future financial opportunities, among other things. If this is something you may need to consider, or you need support in processing, check out the National Debt Helpline or call 1800 007 007.

The impact of bankruptcy on your credit file could see your score reduce to zero, or be removed completely. This is because some credit reporting bureaus, such as Equifax, do not score credit files where there is bankruptcy.