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How is your credit score calculated?

Credit scores take many factors into account. Find out how yours is calculated.

02 February 2022Lloyd Smith 4 min read
How is your credit score calculated? Credit reporting agencies

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If you are looking to apply for a credit or a loan, you will need to be aware of your credit score and how this will impact your application.

ClearScore can calculate credit scores and provide you with a credit rating, so you can keep on track of your financial information before you contact potential lenders.

Credit scores are calculated using various scoring models, and each element of the calculation has different levels of importance. Credit scores are based off information provided in credit reports, providing full details of your financial situation, and assesses your likelihood to repay any loans.

Credit scoring models generally are calculated based on:

  • Payment history
  • Number of accounts
  • Types of accounts
  • Length of credit history
  • Credit history to available credit ratio

Using these factors, financial institutions generate a credit score to distinguish your status as a borrower. This number identifies your 'creditworthiness' and whether or not you're in a positive financial position to repay potential lenders.

Payment history is one of the biggest factors credit providers take into consideration when calculating your credit score. Especially with the incentive of faster repayments and higher interest rates, those who repay before the due date or always on time are in a better light with their credit history compared to borrowers who struggle to repay promptly. If a person's credit reports show poor payment history, with late repayments or exceeding credit limit, then it is unlikely they will have high credit scores.

A credit score is a number representing your financial history. Credit scores are utilised to determine whether or not a financial institution should approve an applicant a loan for money.

If you have a higher score, you could be eligible for a wider range of loans at lower rates.

If you have a lower score, financial institutions will be less inclined to allow you to borrow large loans. If they do, the interest rates may be higher - as an incentive to repay sooner rather than later. You can check your credit score for free with ClearScore.

There are many factors that affect your credit score, and these can be divided into two categories - negative factors and positive factors.

Understanding factors that affect your credit score can help in mitigating circumstances where you might find yourself falling into a negative situation. Find out what a good credit score is here.

Negative factors

A large number of credit enquiries in a short space of time

If you have a large number of credit enquiries in a short space of time, this can indicate to the financial provider that you either have a lot of financial commitments to repay, or you struggle to save enough funds for your various needs.

If you have a lot of financial commitments on the line or the horizon, the financial provider will take this into consideration. You do not want to overcommit and struggle with repayments.

Similarly, if you find yourself needing to borrow more money than you currently own, you might be in hot water. If you have a lot of enquiries for loans, consider managing them from top priority to lowest priority.

Defaults, missed payments, bankruptcy actions, court judgements

Defaults, missed payments, bankruptcy actions, and court judgments will shed light on your character in a negative way.

When these actions are made, and if there is a history of these actions, businesses and financial institutions are likely to deem your 'creditworthiness' low.

If you have demonstrated a severe struggle to repay loans, financial institutions will likely not accept your borrowing applications as they deem your likelihood of repayments to be low.

Short period credit (e.g. payday lenders)

Oftentimes, the use of short period credit indicates struggle to manage finances properly. If a person is relying on short term credit to fund their life, then credit scores will be impacted by this.

Financial institutions favour highly the people who are able to not rely on these options, as it demonstrates efficiency with personal finances and personal management.

Open accounts with debt collection agencies

Open accounts with debt collection agencies will negatively impact your credit scores, indicating you have had issues with debt in the past.

Again, the 'creditworthiness' will be low and your credit report will reflect this.

Positive factors

Good repayment history

If you have a good repayment history, your credit score will be favourable for credit providers. It demonstrates you can manage personal loans well, with no missing payments.

Your reliability and accountability are positive factors that will benefit your future credit applications.

A low number of credit enquiries

Having a low number of credit enquiries indicates that you are able to manage your accounts well, not relying on loans. Oftentimes, large personal loans like home loans, home equity loans, or auto loans account for the majority of credit limit.

Whether you have one large credit enquiry or a few small ones, the less - the better!

A stable address

Having a stable address or usual place of residence is positive for credit score applications, because there are less chances for decline due to identity theft.

Identity theft is a big issue with large loan applications, so if your personal details are consistent then you can have a better credit score.

No negative entries on your credit report

Having no negative entries on your credit score is the same as getting 100% on a test, what you aim for!

When you make beyond reasonable efforts to ensure your payment plan is up to date, and your loan repayments are paid on time, your credit history will be perfect.

With a perfect credit history, your credit score will be sky high!


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Written by Lloyd Smith

General Manager AU

Lloyd spreads the word about how awesome ClearScore is.