Your credit score determines your borrowing power, which is why it’s important to keep an eye on it and take action to give yourself the best possible rating.
Your credit score is calculated using the various listings on your credit file.This means your ability to repay credit is reflected by your history of paying bills and debts. Lenders use your credit score to assess the risk involved in giving you credit, such as if you are likely to miss payments or default.
Keeping tabs on your credit score can help you remain aware of how you look to lenders and notice any adverse events in your credit file that could be damaging your ability to get credit. Checking your credit score before applying for credit can improve your chances of success, though it’s still important to order your credit file from reporting agencies each year and check whether there are any mistakes or fraudulent listings that could be harming your credit score.
What is a credit score?
All credit-active Australians have their credit information listed in a credit reporting agency’s database, with their credit history, credit infringements and other financial and personal information compiled into a file that is used to determine their credit score. Multiple credit enquiries over the last 12 months, court judgments, bankruptcy or insolvency notes, missed bill payments and other outstanding debts all look bad on your credit profile and negatively influence your credit score. With a low credit score, you will most likely be denied credit by most lenders or will only be able to access credit from lenders with very high interest rates.
How does a credit score work?
Credit providers use your credit history to determine whether you are eligible for credit. Veda has a unique scoring system that ranks all credit-active individuals in its database on a scale of 0 to 1200. Higher scores indicate lower credit risk while lower scores indicate the likelihood of a default. Here is the risk grade used on a VedaScore:
- Below average to average (0% - 40%). This score range indicates a very high likelihood of adverse events being listed on your credit file within the coming year. Such events may include court judgments, bankruptcies, insolvency or defaults.
- Good (41% - 60%). With this score range, the person in question is less likely to declare bankruptcy, miss a payment on a debt or have a court writ or judgment included in his credit file, indicating less likelihood of a default.
- Very good (61% - 80%). Such a score would indicate a low credit risk index due to the unlikelihood of adverse events being listed on the individual’s credit file within the next 12 months. Such a score would look good to lenders and would lead to easier approval for credit facilities such as car loans, mortgages and mobile phone contracts.
- Excellent (81% - 100%). Individuals with such a score range have a near perfect eligibility for credit since they are about five times less likely to default than an average credit-active Australian.
How is my score calculated?
Your credit score is displayed as a percentage and lenders apply it to their own lending criteria to determine whether you are eligible to borrow from them. Here is a guide to the factors looked at while calculating your credit score:
- The type of credit provider. Different lenders apply different criteria to your credit application approval, so the lender making the enquiry is factored in when determining your credit score. For instance, the level of risk associated with a utility company may differ from that of a bank.
- Personal details. Details of your employment history, age and length of employment, or even how long you have been at your current home address, could affect the level of credit risk assigned to you.
- Default details. Veda looks at the number of serious infringements on your credit report to better understand your financial reliability and hence your credit score. The number of defaults, clearouts or outstanding debts on your credit history directly impacts how high your credit score will be.
- Court writs or default judgments. The number of court judgments, personal insolvencies, writs and bankruptcies or other public documents on your credit file will determine how high your score will be.
How do I get a copy of my credit file?
If you want a copy of your credit file, you have a right to order it from any of the main credit reporting agencies in Australia. Agencies such as Veda, Experian and Dun & Bradstreet can have a copy of your credit file dispatched to you for free within 10 working days, or you can have an urgent copy sent to you for a fee. Getting a copy of your credit file can be good for your financial future as it enables you to check your standing with credit providers and figure out how to raise your credit score.
Credit reporting agencies can also help you make sense of the information in your credit file and correct personal details that could be entered incorrectly. Should you find any erroneous listings on your credit file, you can request corrections or have notes added to the credit report to better your credit reputation and raise your credit score.
Why is it important to check my credit file?
One way to improve your credit score is to ensure that overdue debt and other default notes are not included in your credit file. Checking your credit file regularly is therefore a good way to monitor your credit score and prevent any listings that could affect it from finding their way into your report. Here are the top reasons for checking your credit file regularly:
- Checking for incorrect defaults. In some cases, erroneous listings are the main reason for a bad credit score. Checking your credit report can reveal incorrect accounts, debts wrongly listed as defaults or debts listed twice, which can then be removed to improve your score.
- Looking for incorrect personal information. Incorrect information about your current address can be detrimental to your credit reputation. This would mean that bills and other notices from credit providers would not reach you, leading to more default listings on your credit file.
- Identity theft. Check your credit file regularly to ensure that there are no foreign credit applications or bills not known to you, as these might indicate that you have been a victim of identity theft.
How can I deal with incorrect listings on my credit file?
An incorrect listing on your credit file lowers your credit score, so it’s important to ensure it is removed quickly. Since you cannot pay a fee to have your incorrect listings removed, you must contact your credit provider and formally request a correction.
Only listings that are incorrect or outdated can be removed by creditors, while listings that result from identity fraud can have notes added to them to indicate that you were a victim of crime. Ombudsman service providers can be of assistance should you dispute a listing that your credit provider insists is correct, while corrections to your personal details can be dealt with by asking your credit reporting agency to make the necessary amendments.
You also have the option of enlisting the help of a credit repair agency, who can help you identify incorrect listings and have them removed. Credit repair agencies may be able to remove listings that you did not know were incorrect, as credit providers sometimes do not adhere to the complicated procedures required to place a listing on your file. Keep in mind this is a complicated and expensive process, and there is no guarantee of the listing being removed.
FAQ about your credit score
What is a VedaScore?
This is a credit risk ranking score that compares different credit-active individuals held in the Veda database. It may be used by a credit provider to assess the risk associated with approving your request for credit. The score is calculated using factors derived from the information in your credit history.
How can erroneous credit applications be corrected?
Credit applications made by fraudsters or credit accounts that are not yours but are wrongfully listed in your credit report can only be removed by the credit provider who listed them. You can hire a credit repair agency to initiate an enquiry into these listings and request that the credit provider remove them.
How can I improve my credit score?
You can do this by spacing out or limiting your credit enquiries, paying all your debts on time and clearing your credit card debt in full every month. Utility bill payments and rent payments should also be made on time.