What has the biggest impact on your credit score?

What has the biggest impact on your credit score?

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

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

Generally speaking, your credit score is calculated based on your credit report, which includes:

  • Money you borrow, including loans and credit cards
  • Your repayment history
  • Credit applications
  • Defaults
  • Bankruptcy
  • Debt agreements

Unfortunately, the impact of each event and how it is graded differs for the credit reporting bureaus in Australia. Because of this, it’s hard to pinpoint exactly which event causes the most positive or negative impact to your credit history. But we can take a look at some of the biggest influencers.

Let’s explore some of the most significant financial decisions and events that can 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. Now, thanks to comprehensive credit reporting, your positive credit history is 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. However, if you’re making multiple applications in hope one will be approved, this is also noted 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 bolstering your application as much as possible 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 max out your credit card, or apply for too great a credit limit, this may lower your credit score. This is because your score is partially based on your debt-to-credit ratio. This is a personal financial measure of how much debt you have to your income. Understandably, having too high of a debt-to-credit ratio may showcase a level of financial irresponsibility to credit bureaus. 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 utilities as well, including a phone plan under your name. A late payment is classified as more than 14 days past due date and may be recorded in your credit history.

If you’re having a hard time and need a little breathing room, speak to the provider immediately as they should be able to negotiate a payment plan for you or offer hardship support.

5. Closing a credit card

It may seem counterintuitive as you’re closing off your ability to accrue debt, but oftentimes Australians who close a credit card may find their credit score has lowered. This may be for a number of reasons, including the length of time you’ve had the credit card and whether you’re switching to a new one and have a new enquiry on your file.

It may also be because being able to meet credit card repayments and manage your credit limits is considered a positive impact. Credit bureaus and credit providers want people to showcase a level of financial responsibility, and by closing your card you’re cutting this positive aspect off.

6. 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.

7. Bankruptcy

One of the bigger influences on a credit score are the more severe events, such as defaults or bankruptcy. If you are struggling severely to repay your debts, you may consider this legal process in which you declare you cannot meet repayments. While it can release you from some of these debts, it may have significant impact on your credit score.

The exact impact is unknown, but it’s safe to say that it may potentially bring your score down to zero. We know this because credit reporting bureaus typically note that people with zero scores “have a default or bankruptcy on their file”.

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Learn more about 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.

 

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.

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.

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. 

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.

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. 

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.

 

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. 

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.  

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 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.