What is your “Credit Score” and what does it mean, exactly?

If you’ve ever tried to apply for a home loan, a credit card, or even a new phone, you’ve probably heard someone mention your “credit score” and how important it is.

So, what exactly is a credit score and how does it affect you?

A credit score, or credit rating, is a number calculated by a credit bureau that is used by lenders to determine how trustworthy you are with credit. It takes into account personal and financial information kept in your credit report and comes back with a number, usually between 0 and either 1000 or 1200, that helps them determine whether they are willing to lend you money, and how much you can “safely” borrow.  Accordingly, the higher your credit score, the better the loan options you are likely to get, and the lower the interest rates they’ll charge.

How is your credit score calculated?

When you apply for any type of credit in Australia, you will need to give the lender or credit provider permission to access your credit score. A credit score is calculated based on an algorithm that uses the information in your credit report. This information includes, but is not limited to:

•  Your personal details:
  • Name
  • Date of birth
  • Employment history
  • The length of time you’ve lived at your current address
• Your credit history
  • The type and amount of credit you’ve applied for in the past
  • The credit provider
  • Product
  • Opening and closing dates
  • Credit limit
  • The number of credit applications you’ve made
  • Your repayment history (whether you’ve made your payments on time)
  • Overdue accounts

The algorithm then takes into account your details, such as age and duration of employment, any high-risk indicators in your credit history (defaults, bankruptcies, court judgements, or credit infringements), the length of your credit history, and your repayment reliability as well as the number of credit enquiries you’ve made in the past and the amount and type of each to generate a number.

The number generated depends on the credit reporting body (CRB) calculating it. There are three CRBs in Australia:

• Experian
• Illion
• Equifax Australia

For the first two, the number will be between 0 and 1,000, while for the last, it ranges between 0 and 1,200. While your score may be different depending on which CRB it comes from, it will still fall into one of five categories:

Your score can be affected by positive and negative incidents or actions in your financial history.

What can negatively affect your credit score?

• Missing loan or credit card repayments
• Not paying bills on time or in full
• Maxing out your credit cards
• Black marks such as bankruptcy, court actions, defaults, and credit infringements – these can stay on your credit report for 5-7 years
• Too many credit inquiries in a short amount of time

What can positively affect your credit score?

• Repaying credit cards and loans consistently
• Paying your bills on time
• Keeping your credit enquiries to a minimum
• Make sure there are no mistakes in your credit report
• Do nothing – the information on your credit report has an expiry date; wait it out
• Build stability in your life – married homeowners who have had the same job for a long time are more reliable

Bottom line:

You are entitled to a free credit report at least once per year. Checking your credit score does not have a negative impact on it – if anything, it’s the contrary. Keeping an eye on your rating can help you determine if there are any mistakes on it and whether you can do anything to improve it.

If you’re interested in applying for a loan and are unsure what your credit score is and how best to use it to your advantage or if you’re struggling to balance your finances and need help getting your score to where it needs to be, talk to our friendly lending experts today.