No one likes to be judged, least of all for their financial choices. But whether we like it or not, if you’ve ever applied for credit, you probably have a credit score.
And it’s quite handy to know what your credit score is.
Luckily for you, we’ve done the research and whittled it down to the nitty-gritty. Keep reading as we delve into the whats, whens and hows of credit scores.
What is a credit score, anyway?
Put simply, a credit score or credit rating is a number between 0 and 1,000-1,200 (depending on the credit report agency). Much like in your high school exams, you’re looking to get a high number. The higher, the better.
But why, you might ask? Well, lenders look at your credit score to work out if they should lend you money or extend you credit. For example, if you move into a new sharehouse and it’s your job to sign up for internet with Telstra, you could find Telstra takes a look at your rating to determine whether they think you’re a worthy enough candidate for their post-paid services.
It’s not just service providers, though. Credit providers, such as banks and credit unions, will most likely look at your rating when determining whether to lend you money. This could impact whether you’re approved for credit including from a credit card to a mortgage.
And that’s why it’s important you read up on credit scores, learn about the ins-and-outs of credit reporting in Australia, and discover how to find out and track your credit score.
How is your credit score calculated?
Your credit score is calculated using the information on your credit report.
Your credit report is a detailed breakdown of your financial history, good and bad, over the previous 10 years. Your credit score is calculated by credit reporting agencies using the plethora of financial and personal information that is detailed on this credit report.
Let’s look at some of the information that might be collected by an agency.
Some agencies will consider personal information such as your age, where you live, how long you’ve lived there, and your employment status.
The type of credit providers you use (or have used)
There are many types of credit providers — from banks to utility companies to store finance providers — and each is associated with its own level of risk. Thus, the type of credit providers you have used in the past could impact your credit score. If you have turned to non-traditional lenders in the past, it would likely impact you differently than if you had turned to banks. Unfortunately, we can’t tell you how providers are weighted, as each agency will have its own methods.
The amount (and type) of credit you’ve borrowed or requested
Again, the type and amount of credit you’ve borrowed could have an impact on how your score is calculated. For example, in the eyes of a reporting agency, a mortgage could carry a different level of risk than an application for internet. Likewise, if you had borrowed $1k in the past, this would likely be considered differently than if you’d borrowed $10k.
The number of credit enquiries you’ve made
When you apply for credit, the credit provider will usually obtain a copy of your credit report to determine your “worthiness.” When they do this, an “enquiry” is added to the report. Over time, these enquiries can suggest a pattern — especially if the enquiries are frequent. This could suggest to a credit provider that you’re “shopping around” for credit and may have a negative impact on your credit report, and in turn, your ability to be extended credit.
It’s worth noting that every enquiry made is added to your report. So, if the Commonwealth Bank makes an enquiry and decides not to offer you a credit card, the enquiry is still added.
Any unpaid or overdue loans or credit
As of September 2018, additional information about the credit products you hold is being added to your report. This could include an overview of the credit products you’ve held in the last two years, your usual repayment amount(s), how often you may your repayment(s), and if you make them by the due date. A missed payment can impact your score.
Information relating to bankruptcy and defaults
Any debt agreements or personal insolvency agreements that relate to a bankruptcy will likely be highlighted on your credit report. Likewise, if you have any defaults, such as credit infringements or overdue debts where a default notice has been issued, you’ll find they likely are listed on your credit report.
Every credit reporting agency collects different information and weights it in their own way.
A few more things you could find impact your credit report include: court writs, default judgments, the age of your credit report, directorship and proprietorship information, having too many credit accounts in your name, and so on.
It’s also worth noting that if you and someone else (say, a life partner or business partner) take out a loan together, and that person defaults on the debt, it can impact your credit score in the same way it would if you were to take out a loan individually.
What is considered a good credit score in Australia?
There are several credit reporting agencies within Australia, and each one will calculate your score a little differently. Having said that, your score will always be a number that falls between zero and 1,200, with most on the zero to 1,000 spectrum.
Your score is rated on a five-point scale, which runs from below average through to average, good, very good, and excellent. The position of your credit score on this scale indicates the risk you pose. The higher your score, the less risky you appear to credit providers.
Excellent — Generally, scores in this range start at around 800. People with scores in this range are considered highly unlikely to have an adverse credit event in the next year.
Very good — Generally, scores in this range start at around 700. People with scores in this range are unlikely to have an adverse credit event in the next year. (This also is where people with new credit reports usually start out.)
Good — Generally, scores in this range start at around 600. People with scores in this range are less likely to experience an adverse credit event in the next year.
Average — Generally, scores in this range start at around 500. People with scores in this range are likely to experience an adverse credit event in the next year.
Below average — Generally, scores in this range start at around 0. People with scores in this range are more likely to experience an adverse credit event in the next year.
Does everyone have a credit score?
If you’ve ever applied for credit in Australia, you probably have a credit score.
Just to be clear, applying for credit could mean anything from applying for a credit card to signing up for a mobile post-paid plan to registering for an electricity or gas bill.
When and how will my credit score be used?
If you want to apply for credit of any kind in Australia, you can be fairly sure the credit provider will first want to check out your score to determine your creditworthiness.
So, let’s say you want to apply for a credit card. The bank will check out your score and make a determination based on your ranking. Even if you already have a credit card, but you want another one, or you want to transfer a balance, the bank will still run a check.
If you apply for a home loan, the home loan provider will check out your score.
If you want to sign up for that internet account at your new sharehouse, the services provider will likely run a check to ensure you are a viable candidate.
And these are just a few of the times your credit score is used.
What’s interesting is that your credit score doesn’t always inform a yes/no answer.
For example, let’s say you want a credit card with a limit of $5,000. The bank will check out your score. Then, they might determine your score is not where they’d want it to be for a $5,000 credit limit, but you still qualify (in their mind) for a $2,000 credit limit.
Essentially, this means that the higher your credit score, the more likely it is that the credit provider will lend you money on better terms, which makes it easier to pay off your debts. The better the terms of the loan, the better financial position you’re in.
Should I check my credit score — and how often?
Yes, if you want a total picture of your financial health, it’s important you have an idea of what your credit score is. After all, if you don’t know what your score is, you don’t know your chances of being approved for credit products — and you don’t know if it needs improving.
In addition, checking your credit score can help protect you from fraud by identifying credit activity you did not authorise. Both your credit score and your credit report are updated monthly.
And by the way, when a person checks their own credit score, it doesn’t register as an enquiry on the report, so feel free to check yours as often as you like.
How can I check my credit rating for free?
In Australia, you can get a free credit score from a number of online providers, including:
You can even check with all these providers if you’d like. Again, there is no negative impact when you check your own score. And in fact, your score will almost certainly be different from one provider to the other, so checking with a few providers is usually the best way to get a consistent measure of your credit rating and discover any potential problems.
Problems, you say? Because providers use various credit reporting agencies for info, you will sometimes find that your scores may be different from one provider to the other. Where this difference is significant or unreasonable, this can signal a problem, such as fraud or ID theft, in which case you should order full copies of your credit report (from each of the credit score providers) and compare them for differences. You can then get these problems fixed.
What if my credit report has incorrect information?
If you receive a copy of your credit report and discover incorrect information or enquiries and listings on the report that haven’t been made by you, it’s important you take action.
In the worst case scenarios, criminals can steal your identity and take out credit in your name, which is why it’s important your report is accurate.
If you find a problem, talk to the credit reporting agency about the next steps you may take to rectify it.
How can I improve my credit score?
So, you’ve looked into your credit score and it’s not quite where you want it to be. Let’s have a quick look at some of the ways you can improve your rating:
- Check your file — Have a look through your report for high-risk listings. This could mean credit cards with high limits, multiple loan products, multiple inquiries in a short space of time, or even defaults and credit infringements.
- Identify what you can improve — Once you’ve had a look, see if there are any areas where you can improve. For instance, maybe you have a credit card with a $10k limit, but you rarely use more than $1k at a time. In that case, it may be worth lowering your limit to, say, $2k.
- Keep an eye on your score — Generally, the best thing you can do in the long-term is to keep an eye on your score and understand the ins and outs.