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How your credit score works


Ever wondered what your credit score is or what it’s used for? We explain why your credit score is important.

Have you ever checked your credit score or wondered what it is? Knowing your credit score is important, as it can impact your ability to apply for a credit card or home loan. If your credit score needs a bit of work, there are things you can do to improve it.

What is a credit score?

Your credit score or rating is a number that’s based on personal and financial information about you. It’s used by lenders or businesses to evaluate your trustworthiness when you put in an application for a home loan or credit card, or apply for insurance or a rental property.

If you have a bad credit score, lenders might decide you’re not trustworthy as a borrower, or feel there’s a greater risk to lend to you and could subsequently charge you a higher interest rate on a credit card, for example.

Knowing your score is very useful. It might help you understand why you may have been rejected for a credit application, or if you have a good credit score, you could use it to negotiate a better deal.

How are credit scores calculated?

In Australia, credit scores are usually a number between zero and 1000 or 1200. For example, at Equifax, a score of 700-749 may be considered ‘good’ and anything above is considered ‘excellent’. Scores under 580 fall into the ‘poor’ range.

It’s worth noting that the number may differ depending on which credit reporting bureau you access your credit score from. It’s calculated based on things like:

  • How much money you’ve borrowed in the past
  • The number of credit applications you’ve made
  • The length of your credit history
  • Your payment history (i.e. do you pay your bills on time?)

How can my credit score impact my ability to get a loan?

If you’ve got a number of credit cards that are always ‘maxed out’, that can negatively affect your credit score. Similarly, your credit score will suffer if you’ve made late payments on a credit card or loan, missed a mortgage payment, have unpaid debts, don’t pay your utility bills on time or have ever filed for bankruptcy.

Making multiple credit applications for things like a personal loan or a home loan in a short period of time can also impact your credit rating, but checking your own score won’t affect it. Keep in mind that lenders will look at a number of factors when reviewing your application, so you don’t need to have a credit history or a credit card just to apply for a loan. Things like your income, savings, assets and debts are all taken into account.

How can I check my credit score?

If you’ve ever applied for a loan or a credit card, or had a utility bill in your name, there should be a credit report you can access and you have the right to look at it for free via a credit reporting agency. These agencies use different formulas to come up with your score so you may wish to cross-check yours across multiple agencies:

 The reports are usually available in minutes, but you’ll have to enter in identifying information such as your name, driver’s license, address and other details depending on which credit reporting agency it is.

For the bigger picture, get your credit report

You may have to pay a small fee for your credit report depending on how soon you want it, but it’ll have a lot more information in it than just your credit score.

When it arrives, check to make sure all the loans and debts on it are listed as yours and that all the identifying details on it are correct. If anything is wrong or out of date (such as the amount of a debt you have, or your name or address), you can request to have the credit reporting agency fix it up for you for free. If you spot anything in the report – like a loan you never applied for – this is a red flag that you may be a victim of identity theft.

Just be aware that you can’t change any negative information in your report if it’s correct – so things like overdue payments, or applications for loans or credit cards stay on your report for five years.

How can you fix a bad credit score?

If you check your credit score and it falls into the ‘poor range’, you can take steps to improve it. Start by identifying what might be impacting your rating and consider the following:

  • Reduce your credit card limit, especially if you’re not spending even close to the limit
  • Get rid of credit cards you rarely use but have as a back-up
  • Consolidate multiple debts into one – you could save on fees and one debt is easier to repay
  • Don’t make too many applications for credit or loans, especially close together
  • Always pay your rent or mortgage on time
  • Set up direct debits to ensure your utility bills are paid on time
  • Pay your credit card on time every month.

Keep an eye on your credit rating every quarter by going to one of the above credit reporting agencies and checking out your credit score. You’ll be able to see if your efforts to improve your score are paying off, or if you need to do more to move the needle.

This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Information in this article is current as at the date of publication. We do not recommend any third party products or services and we are not liable in relation to them. Any links to third party websites are for your information only.

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