A credit score can have a lot of influence on your ability to borrow from banks and other lenders. So, if you're looking to apply for a credit or loan, it’s a good idea to check out your credit score.
Like most people, you’re probably thinking: what is a credit score, and how can it affect my ability to access a credit or loan? In this article, we break down all the need to know for credit scores and how to improve them.
A credit score, also known as a credit rating, is the number that represents your financial history. Banks and other lenders use this score to indicate your reputation as a borrower, determining your creditworthiness to pay them back.
Credit is when you borrow money with the agreement that you’ll pay it back later. It comes in many forms, including credit cards, personal loans, paying for monthly instalments and more.
is based on a credit report. This is a record of how you’ve handled previous credit in the past. Credit reports sit on a scale from 0 - 1,000 or 0 - 1,200, depending on which reporting agency is conducting the report.
The three comprehensive credit reporting bodies in Australia are:
- Experian: 0 - 1,000
- Equifax: 0 - 1,200
- Illion: 0 - 1,000
ClearScore uses Experian's credit score range.
Each of the three reporting bodies in Australia has different systems and methods in place for generating your credit score. Therefore, determining a good credit score can be misleading, as it depends on the agency conducting your report.
Furthermore, financial institutions look at a range of factors when deciding whether or not to lend to you. So while you may get refused credit by a lender, another one may accept your credit application.
Generally however, a higher credit score is better because it signals a strong borrowing history. If you have a good score, it indicates to lenders that you are a low risk for repaying their credit and therefore more likely to approve your application.
Here are the Experian credit score bands (and what we call them at ClearScore):
Raise your game
On the up
On good ground
Meanwhile, for Equifax, a ‘good’ score is 666-755, a ‘very good’ score is 756-40, and an ‘excellent’ score is 841-1,200.
Illion’s reports consider a ‘good’ score to be 500-699, a ‘great’ score of 700-799 and an 'excellent' score to be 800-1,000.
can have serious implications for your ability to access loans or credit services from banks and other lenders. Poor credit scores show financial institutions that you have historical problems repaying debt and therefore classify you as a high risk borrower. As a result, credit scores can give banks and lenders a reason to deny your application for a loan or credit.
Low credit scores across the three Australian credit bureaus are:
- Experian ‘below average’ band: 0-549
- Equifax ‘below average’ band: 0-505
- Illion ‘low score’ band: 0-299
Your credit score is a critical factor that banks and other lenders consider when assessing your risk as a borrower. Aside from a higher approval rate on credit or loan applications, a higher credit score can also increase your loan amount and reduce the interest rates on repayments.
If you have a lower score, lenders will likely offer you credit at a higher interest rate or reject your application altogether. So it's important that you maintain the highest credit score possible so you can apply for future loans or credit with ease.
When reporting bodies like Experian, Equifax and Illion calculate your score, theyand look for signs that communicate your reputation as a borrower.
Among these signs, credit reporting agencies look for repayment history, high risk indicators and previous types of credit providers used.
Repayment history is a central consideration for when reporting agencies are calculating your credit score. This history includes credit payments, bills or loan repayments, such as a home loan. According to Experian,is made up of your repayment history.
Repeatedly missing or making late payments can have detrimental impacts on your credit score, as this behaviour indicates to financial institutions that you’re likely to miss future payments.
High Risk Indicators
When assessing your credit history, reporting agencies will also look for any indication that you are a high risk borrower. These high risk indicators include a range of actions, including:
- Excessive number of credit applications
- Missing ‘Buy Now, Pay Later’ (e.g. AfterPay) payments
- Shopping patterns
- Defaults (unable to repay previous debts)
- Apply for ‘payday loans’ (small amounts of money lent at higher interest rates with the agreement to repay it when your next wage arrives)
- Regular applications for balance transfers
- Declaring bankruptcy (will last on your file for five years or two years from when you were no longer bankrupt)
- Court judgements (will last on your file for five years)
Types of Credit Providers (that affect CS)
According to the, a credit provider is either a bank or any corporation whose substantial business is providing loans, continuing retail business while issuing credit cards or determined by the privacy commissioner to be a credit provider.
Historical types of credit providers that you have been with can influence your credit score. Depending on their profile as a lender, each type of credit provider may come with a certain associated risk level. For example, if you previously accessed credit from a non-traditional lender rather than a bank, this may influence your score as the activity suggests high risk borrowing.
Missing or Making a Late Repayment
Missing a repayment can significantly impact your credit score, as it is an indication that you may be a high risk borrower.
According to Equifax, paying your credit card or loan repaymentafter its due date is considered a late payment. While this will affect your credit score, one late repayment will not significantly reduce your credit score. However, recurring late payments will negatively affect your credit score.
A court judgement is where a creditor takes you to court over the money you owe them. If proven guilty, you may have a court judgement recorded to your name. Court judgments stay on your credit report for five years and can reduce your score significantly. As a result, you may find it difficult to get approvals for a credit or loan, and if you do, it will come at a much higher interest rate.
High Number of Credit Enquiries
Each time that you apply for credit, an enquiry is left on your report. The number of enquiries on your report can further reduce your credit score if you have multiple accounts or short credit history.
Furthermore, a high amount of credit enquiries on a report indicate higher risk and, therefore, a lower credit score. For example, applying for multiple credit cards over a short period of time will appear on your report and affect your credit scores.
If your credit history involves these impacting factors, don't worry! There are plenty of steps you can take to improve your credit score.
Fortunately, there are some effective methods that you can incorporate into your financial decision making that will help.
You can expect to see a positive change in your credit score if you:
- Manage your bills and debts: make sure that you always make your credit and loan repayments on time while also consistently paying for your bills. Creating a budget or establishing direct debits will help you keep on top of your repayments.
- Limit credit applications: having a low amount of enquiries on your record is okay. However, excessive credit applications will reduce your ability to lower your score.
- Check your credit report for mistakes: keeping on top of reporting errors is critical for improving your credit score. For example, always check to see if any irregular loans or debts are on your record. Correcting personal details on your credit file, such as a misspelt name or wrong date of birth, can make a difference.
- Lower the credit limit on your cards: setting a realistic limit on your credit card will help you manage your ability to make repayments on time and, therefore, improve your credit score.
If you're looking to improve your own credit score, you should consider keeping track of your financial actions to see any positive change.offers you free credit report and free credit score services to help you effectively track and stay on top of your finances.