What’s in this guide:
- What is a credit score?
- How is it different from a credit report?
- Comprehensive credit reporting
- What is a good credit score?
- How credit score impacts your borrowing power
- What gives you a bad credit score?
- How to improve your credit score
If you’ve never checked your credit score – or don’t even know what it is – you should, because it can have a big impact on your life.
What is a credit score?
A credit score – used interchangeably with ‘credit rating’ – is essentially a numerical representation of your trustworthiness as a borrower. Lenders and credit providers can look to this score to determine:
- How much they’re willing to lend you for a home
- What interest rate to charge you
- Whether you can afford to meet your repayments
- Whether you should be approved or rejected for a car loan, personal loan or credit card
- What your credit limit should be on a credit card
Even if you’ve never owned a credit card or taken out any kind of loan, you may have a credit rating based on your utility (e.g. electricity, internet) or mobile phone payment histories.
A range of different things can have a negative or positive effect on a credit score. Racking up thousands of dollars of credit card debt, being rejected for multiple credit applications or declaring bankruptcy are things that will typically have a negative effect on your credit score, making it harder to be approved for loans from reputable lenders.
Good credit behaviour, like consistently meeting payments and not borrowing beyond your limits is likely to have a positive effect on a credit score.
How is it different from a credit report?
The score is the individual number contained within the credit report, which also collates all your information within it. You’ll have more than one credit report out there too; ASIC’s MoneySmart lists four different recognised credit reporting agencies:
- Equifax | equifax.com.au | 13 83 32
- illion | illion.com.au | 13 23 33
- Tasmanian Collection Service | tascol.com.au | (03) 6213 5555
- Experian | experian.com.au | 1300 783 684
These agencies may outsource their credit reporting tools to other companies.
According to MoneySmart, a credit report includes:
- Your personal details (name, DOB, addresses, employment etc.)
- Any credit or loans you’ve applied for
- Any missed payments
- Defaults within the last 60 days
- Other credit infringements (e.g. leaving your last known address without paying a debt)
- Bankruptcies, court judgements, insolvency agreements etc. (these can stay on there for as long as seven years)
All of this information, combined, leads to a final credit score, which will lie somewhere between 0 and 1,200. MoneySmart has a sample Equifax credit report which you can view here.
Comprehensive credit reporting coming in hot
Until recently, all lenders in Australia used a “negative” credit reporting system of credit where only negative information (like rejection applications, missed repayments) were recorded on a person’s credit file, making it harder to build a strong credit score. But, since 1 July 2018, major banks in Australia now use a “positive” system called comprehensive credit reporting (CCR).
CCR aims to give lenders a more complete and comprehensive assessment of a borrower’s capabilities. To do this, ‘positive’ consumer credit habits like regular payments and responsible credit use will be marked on a person’s credit report, enabling them to recover from adverse events (like defaults) more quickly. This could lead to more favourable rates for customers and improved access to credit for those who have proved themselves trustworthy. CCR was opt-in for lenders when it was first introduced in 2014, but from 1 July 2018 it became mandatory under federal law for Australia’s big four banks (ANZ, CommBank, NAB, Westpac) to fully participate in the CCR system. Many other lenders have started using it voluntarily.
What is a good credit score?
Each of the above credit reporting agencies separates their credit scores into five separate bands, the exact names of which depend on the agency you use:
- Excellent: the top 20% of borrowers, people with ‘excellent’ scores are seen as highly unlikely to have any adverse events harm their borrowing ability in the next 12 months.
- Very good or great: those with very good or great scores are seen as unlikely to experience difficulty in meeting repayments.
- Good: adverse events an missed repayments are seen as less likely to occur by the lender.
- Average or fair: It is seen as likely that an adverse event could occur and make you unable to meet your repayments.more
- Below average or weak: the bottom 20% of the credit-active population, lenders will think it more likely that an adverse event will occur to you, such as a bankruptcy or default, in the next 12 months.
These five bands are divided into different score ranges, which can vary depending on which credit agency you go with.
The table below shows the different score ranges credit agencies use.
Credit score chart
|Equifax||Experian||Credit Simple (ilion)|
Source: Equifax, Experian and Credit Simple.
Hot take: ‘average’ is the second worst credit score band because the average Australian really isn’t that good with credit – they have an average of about $2,000 in credit card debt (according to RBA stats in September 2018), while about a third of home-owners are experiencing mortgage stress (according to Digital Finance Analytics). Strive to be better than average!
These scores only factor in cold hard facts, so your gender, race or religion won’t have any effect on your score – it is purely dependent on your history as a borrower.
Your credit score impacts your borrowing power
If your credit score lies in that ‘excellent’ range, then you’ll stand a higher chance of getting approved for lower home & personal loan rates, as well as more favorable lending conditions in general. You might be able to negotiate a higher credit limit on a credit card, or get a big fat rewards points or reduced fee offer if you say you’re switching to a different credit card.
At the other end, below average or weak scores will make it much harder to get a good deal on loans and credit cards. It’s in the lender’s interest to reject you if they think there’s a high chance you won’t see the loan through to the end.
This is why you should seek to slowly improve your credit score over time, instead of resorting to bad credit loans, payday lenders or selling your blood and teeth for money.
What gives you a bad credit score
Looking at what can help a credit score, it probably doesn’t take much to figure out what can harm it:
- Making late repayments on loans and credit cards
- Missing repayments entirely
- Applying for too many loans and credit cards at once
- Rejections for loans and credit cards
- Missed bills that are more than 60 days overdue ($150 or more)
- Not paying off a balance transfer by the end of the promotional period
Contrary to some myths you might have heard, checking your credit score doesn’t affect your credit score in the slightest.
How to improve your credit score
There are a few little things you can do to boost your credit score:
- Making credit card and mortgage repayments on time, consistently
- Making bill and rent repayments on time (also consistently)
- If you do have debts, then paying them off or consolidating them onto a single loan/balance transfer
- Lowering your credit card’s limit
- Not maxing out credit cards – it’s generally recommended to spend about 30% of your credit limit to show control
- Not applying for too many cards and loans
- Being older (if you’re young, try to get older! Credit scores can be slightly affected by age, as older people tend to be more responsible).
You can’t immediately increase your credit score – these steps are things that have to be taken over time, so it’s generally better to start some positive behaviours such as these ahead of time if you know you’re going to need a loan in the not-too-distant future.
Note: you can ask for revisions to be made to your credit report if you’ve found errors. For example, a debt might be listed twice, or it might incorrectly have put down a missed payment that you did make. If you notice a mistake, you have 12 months to report it to your reporting agency, your credit provider or the Office of the Australian Information Commissioner. This can boost your credit score, but only if a mistake was made in the first place.
How long does it take to improve your credit score?
It depends on how low your score is, but it can take a while for your credit score to improve if you don’t take proactive steps to improve it. For example, your credit score will likely never recover if you continue to miss payments and apply for different credit products.
While serious credit infringements like overdue debts can remain on your credit report for up to seven years, if you take proactive steps to improve your credit score, it’s possible to see a significant improvement within a year.
Savings.com.au’s two cents
Your credit score is important, as it can directly impact your ability to borrow for years to come. Having a low credit score can make it difficult to get the loan you want, so you should endeavour to improve your score through the methods we discussed above. This can take a bit of time, so identify any loans or credit you might need ahead of time (think at least a year) and plan accordingly. You might want to speak to a financial advisor about how long it will reasonably take you to hit your target score.
Obtaining a copy of your credit report is free, and doesn’t adversely affect your score, so why not get one from each of the major reporting agencies? It’s worth checking every six months or so to track any changes in your score.