In this article, we will discuss what your credit score means, how it is calculated, and what it means for your future borrowing options.
What is a credit score?
A credit score, also known as a credit rating, is a score given to you based on your borrowing history. When you apply for financial assistance, your credit score is looked at by the lender to determine how responsible you are as a borrower.
Your credit score will vary from zero to 1,000 or 1,200 and is calculated based on a few key factors including your repayment history, total amount of debt owed, length of credit history, types of credit and new credit.
How is your credit score calculated?
There are three main credit reporting agencies in Australia: Equifax, Experian, and illion. Each of these companies use a different formula when calculating your credit score. This means that your credit score will likely differ between each agency. Your score is calculated with consideration of a five-point scale: excellent, very good, good, average, and below average. Depending on your credit score, you will be put into one of these categories.
The scoring of each bureau is outlined in the table below:
|Below Average||0 – 505||0 – 549||0 – 299|
|Average||506 – 665||550 – 624||300 – 499|
|Good||666 – 755||625 – 699||500 – 699|
|Very good||756 – 840||700 – 799||700 – 799|
|Excellent||841 – 1,200||800 – 1,000||800 – 1,000|
If you miss a repayment, default on your loan, or have a serious credit infringement, this information can be recorded on your credit report (which generates your credit score). However, if you make repayments on time, this information is also included in your credit file as part of what’s known as ‘comprehensive credit reporting’. Previously, ‘positive’ credit information was once not required to be disclosed by credit bureaus, meaning a credit report would only detail ‘negative’ information. With comprehensive credit reporting, a more holistic view of a person’s creditworthiness is presented.
How do you get a good credit score?
Having a good credit score will give you more options when it comes to accessing credit. It increases your chances of being approved for a loan and securing the amount you have applied for (given that it’s affordable). In addition, you are often offered the best interest rates and terms on a loan or credit card. This is because your credit report provides the lenders with an overview of risk in terms of non-payment due to previous history, which can provide them with a level of confidence in your ability to repay your loan or credit card balance.
You can get a good credit score by being a responsible borrower. This can include doing the following:
- Making all repayments (loans, credit cards and bills) on time and in full.
- Limiting new credit applications for credit or loan products where possible.
- Having and maintaining an appropriately low credit limit on any credit cards.
- Regularly checking your credit report for any errors or inconsistencies.
How do you get a bad credit score?
There are many ways you can get a bad credit score including missing your repayments, defaulting on your loan, entering into a formal debt agreement, or declaring bankruptcy. This information is all recorded on your credit report for a certain amount of time and can cause your credit score to drop.
If you have a bad credit score, it can limit your borrowing options in the future. This is because most traditional lenders, like banks and credit unions, are reluctant to provide loans or other credit products to people with bad credit. However, if you have bad credit, you might be able to secure a loan through an online or fintech lender. Typically, these types of lenders consider other factors, such as your spending habits and expenses, alongside your credit history.
If you do secure a loan with bad credit, you are likely to be charged a higher interest rate and limited in the amount you can borrow. This is because you are seen as a high-risk borrower and lending to you comes with more risk for the lender.
Tips to improve your credit score
Unfortunately, you can’t ‘fix’ your credit score as it is calculated based on your borrowing history, good or bad. However, there are steps you can take to add positive information to your credit file and, ultimately, improve your credit score:
- Prioritise making all of your credit and bill payments on time.
- Limit new credit applications where possible.
- Consider lowering your credit card limit. This is because your credit limit is listed on your credit report, regardless of whether you spend up to this limit or not.
- Access a copy of your credit report annually from each of the credit reporting agencies to ensure all information is correct. If there is anything incorrect or false on your credit report, you can contact the relevant credit reporting agency and have them amend this for you (it’s free).