Your credit score can have major implications for your borrowing options, often deciding whether you are offered a low or high interest rate. This can end up being a difference of thousands of dollars. So, how do you get a credit score and why is it important?
What is a credit score?
A credit score, otherwise known as a credit rating, is a score given to you based on your credit borrowing and repayment history. This number indicates to lenders how reliable and trustworthy you are at repaying your debts. A credit score is often a factor in the loan application process and can influence whether you are approved or rejected. It can also be used to determine the interest rate offered.
What is a ‘good’ credit score?
The credit score range varies between each reporting bureau in Australia. To gain a general understanding of what is considered a ‘good’ credit score, this is the credit score range used by Equifax:
- Below Average: 300 to 509
- Fair: 510 to 621
- Good: 622 to 725
- Very Good: 726 to 832
- Excellent: 833 to 1,200
Where can you access your credit score?
You can find your credit score listed on your credit report. A credit report includes a detailed description of your credit history including credit applications, repayment history (if the credit provider does ‘comprehensive credit reporting’), any defaults or serious credit infringements.
You can request a copy of your credit report for free once a year from the main credit reporting bureaus in Australia: Equifax, Experian, and Illlion. Each of these companies use different information to calculate your score, and may allocate weighted importance to different factors. This means that your credit score can vary between these agencies.
Alternatively, you can request a copy of your credit score from an online credit score provider. If you use an online provider to check your credit score, these are generally the common steps:
- Verify your identity with a copy of your drivers licence;
- Provide your personal information (e.g. name, residential address, date of birth);
- If the information you provide is all correct, you should have your score generated.
How is your credit score determined?
A credit score is calculated based on the information in your credit report. Typically, there are five main factors considered when calculating your credit score and each factor differs in terms of importance.
Depending on the credit bureau, your score will be a number from 0 to 1,000 or 1,200. This score is representative of a five-point scale: excellent, very good, good, average, and below average.
How often should you check your credit score?
You can check your credit score at any time, either through an online provider or one of the main reporting bureaus.
Most of the online credit score providers allow you to check your credit score for free once a month. While you can access a copy of your credit report from any credit reporting bureau, it’s only free once a year (from each agency). However, there are some instances in which you can access a copy of your credit report more than twice for free if:
- You have been refused credit within the last 90 days;
- You had a mistake or your information corrected and want to check it has been updated.
There are some circumstances in which you may wish to check your credit score including:
- Before you apply for a credit card, car loan, or personal loan;
- If you believe that your personal details have been stolen;
- If you have had a mistake on your report corrected.
How your credit score impacts your ability to borrow money
Your credit score determines your trustworthiness to a bank or lender and your ability to repay borrowed money. Lenders may use your credit score as a factor in deciding whether to approve you. Credit providers need to determine the suitability of an applicant and use different datasets (credit reports, bank statements, etc.) depending on the industry requirements, the requested loan amount and their own lending criteria.
Having bad credit can limit your options in many ways. It not only limits your chances of being approved for loans you apply for, it also limits your lender options. Traditional lenders typically have a minimum credit criteria and will not lend to people with credit scores below a certain threshold. In this case, you may need to turn to an online lender with a more flexible lending criteria. Some online lenders consider other factors than just your credit score to determine whether you are approved or not.
How can you improve your credit score?
If you have bad credit, there are some things you can do to increase your credit score over time. While defaults and serious credit infringements can remain on your credit report from five to seven years, there are steps you can take to demonstrate that you are a responsible borrower.
Responsibly manage a personal loan
By taking out a form of credit such as a personal loan and making consistent payments, you can demonstrate to lenders that you are a trustworthy borrower. As your repayment history makes up a large portion of your overall credit score, responsibly managing a personal loan can help improve it. For example, online lenders offer bad credit loans to eligible borrowers that demonstrate the capacity to afford a loan.
Consolidate your debt
As the total amount of debt owed is a contributing factor to your credit score, minimising the amount of debt you have can help improve your credit score. If you have multiple forms of credit that you are struggling to manage, you may want to consider a consolidation loan. While a consolidation loan will typically require a credit check, impacting your credit score in the short term, it will assist with settling default listings and therefore allowing the listing time to be reduced, along with the positive impact of the status changed to paid or settled.
Minimise your new credit applications
Until you are managing your debts more effectively, it may be helpful to minimise applying for more credit or loans. New debt can increase your credit owed and, as a result, negatively impact your credit score.
In addition, applying for multiple loans or other forms of credit in short succession can cause your credit score to dip. Every time you submit an application for credit, the lender can record a hard enquiry in your credit report. Multiple hard enquiries in a short period of time can indicate to lenders that you are in desperate need of financial assistance.