Ah, credit scores. Most of us have one yet questions remain as to how it is calculated, to what extent your credit score matters, and how to find out what your actual score is.
Today, we’ll answer all your frequently asked questions and provide some pointers about how to maintain a positive credit score. But before we get into credit scores, let's explain how credit reporting works.
What is a credit report?
Your credit report, or credit file, is a digital record maintained by a credit reporting agency. Whenever you apply for credit, enter into a credit contract, or make a repayment, the credit provider reports this information to one of these agencies, which then uses the data to calculate your credit score.
In Australia, there are three main credit reporting agencies:
You can request a free copy of your credit report from each agency once every 12 months using the links above. It’s wise to request reports from all three, as each may hold different information about your credit history.
What's in your credit report?
Your credit report includes details of:
Credit enquiries and applications
Monthly repayment history
Overdue debts and credit accounts
Payment defaults (also known as clearouts)
Account open and close dates
Bankruptcy
Court judgements and court writs
Commercial credit information
Public record information
What is your credit score?
Your credit score is derived from this credit report and is used by lenders to assess your credit risk and determine whether or not to approve you for a loan.
The data in your credit report is mathematically assessed to calculate a rating from 0 to 1,200. This tells lenders the likelihood of you defaulting on credit payments in the next 24 months. The higher your score, the lower your risk. A score of 550 signifies an average risk.
According to Equifax, credit scores are categorised as follows:
Below Average (Bottom 20%) – There is a higher likelihood of an adverse event, such as a missed payment, being recorded on your credit file in the next 12 months.
Average (21% – 40%) – The chances of an adverse event being recorded are still present but in line with the general population.
Good (41% – 60%) – The odds of an adverse event are lower than average, meaning it's less likely that any negative events will appear on your credit file in the next 12 months.
Very Good (61% – 80%) – Adverse events are unlikely, with more than double the average chance that no negative events will be recorded over the next 12 months.
Excellent (81% – 100%) – It is highly unlikely that any adverse event will be recorded on your credit file in the next 12 months. In fact, the odds of no negative events occurring are more than five times better than the average population.
Factors affecting your credit score
Understanding the factors that affect your credit report and subsequent credit score is critical to ensure you make the right financial decisions and keep your score as healthy as possible. Having a poor credit score could stand in the way of you buying your dream home, a bigger car for your growing family, or accessing credit in the case of an emergency.
Does paying bills affect your credit score?
To some extent, yes. In recent years, the credit reporting act was changed so that credit agencies are now able to collect data relating to on-time payments. But potential creditors are more interested in black marks, such as late payments and defaults. A default is usually defined as a payment over $150 that is 60 days or more overdue.
Does making multiple credit applications harm your score?
Yes. Making multiple credit applications in a short time frame is considered a red flag to lenders. It implies that you may be experiencing financial stress. For example, it might seem sensible to secure a home loan pre-approval from multiple lenders to find the best deal. But doing so in a short space of time can damage your credit score and may delay you from getting approved at all.
Are partial payments considered on-time or late?
By missing one of your repayments within a month, not making the minimum monthly repayment or making only a partial payment of the agreed amount within the agreed timeframe, this will be considered overdue and can tarnish your credit rating. If you are unable to pay a bill by the due date, contact the creditor and request an extension. If the situation is likely to be longer than a few weeks, request a financial hardship arrangement. This will give you time and flexibility to get your finances back on track.
How are black marks recorded?
A credit provider can report a default on your credit file if the amount you owe is $150 or more. To qualify as a default, the repayment must also be 60 days overdue and the creditor needs to have tried to contact you by phone or in writing. A default stays on your credit report for either five or seven years, depending on the circumstances.
A credit provider can report a default on your file if you owe $150 or more, the payment is over 60 days late, and they’ve tried contacting you. A default stays on your report for five to seven years, depending on the case. It can only be removed if listed in error, but once paid, it will show as settled, which lenders want to see.
If a default was listed incorrectly, first contact the creditor and reporting agency. If unresolved, lodge a complaint with the Australian Financial Complaints Authority.
Many people are unaware that banks are some of the most reluctant creditors to report a default. They tend to offer their customers considerable leniency. Telecommunications and pay TV companies, on the other hand, are a common source of black mark credit reporting -- something to keep in mind!
So how exactly is your credit score calculated?
Not even lenders know the secret formula to how credit scores are calculated, but there are a few ways you can help keep your credit score stay as high as possible; pay bills and loan repayments on time, do not overuse credit (including buy now pay later services) or carry high credit card limits, and limit the number of credit applications you submit.
Having a good credit score not only makes it easier to get approved for credit or loans, but it also gives you leverage to negotiate better deals with lenders, such as lower interest rates. Cleaning up your credit history can improve your score, increasing your chances of securing favorable terms on future credit.
Got questions? Call and talk with a lending expert on (02) 8313-8400 or request a callback.
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