Find out what makes up your credit score so you can work to improve it.
A credit score is a rating based on the information on your credit file. Throughout your life you make various applications for credit, whether it be for loans, credit cards, utilities or even phone bills, and your ability to manage those accounts is recorded on your credit file. This helps other lenders make informed decisions about whether to lend to you. Your credit score is another factor that helps lenders and credit providers make those decisions.
This guide will show you what information goes into your credit score and how you might be able to improve it.
What is a credit score?
A credit score is a numerical representation of your credit history. Each credit bureau determines your credit score differently. For example, credit reporting bureau Equifax will give you a number between zero and 1200 for your Equifax Score.
Lenders and credit providers use the information in your credit file as well as your credit score to make decisions about whether or not you are a reliable borrower. Finding out your credit score can tell you where you sit in the credit-active population, whether or not you have "good" credit or just "average" credit, and if you might be able to improve your credit position.
How does a credit score work?
Your current credit score is a useful number to know before applying for credit. If you have a credit score in the higher percentiles, you are likely to be approved for credit (if you can afford the loan you are applying for). If you have a low credit score a lender may look harder at your application for credit to ensure you can afford the loan. To demonstrate how a credit score works, we will look at the Equifax Score:
|Credit position||Equifax Score||Percentile||What it means|
|Excellent||833-1200||81-100%||An adverse event is highly unlikely to harm your credit in the next 12 months.|
|Very good||726-832||61-80%||You're two times as likely as credit-active population of Equifax in Australia to keep a clean credit report and it's unlikely you'll incur an adverse event in the next 12 months.|
|Good||622-725||41-60%||You're less likely to incur an adverse event on your credit file, such as declaring bankruptcy, missing a payment on a debt or having a court writ or judgment listed, indicating less likelihood of a default.|
|Average||510-621||21-40%||You're likely to incur an adverse event such as a default, bankruptcy or something similar in the next year.|
|Below average||0-509||0-20%||This score range indicates a very high likelihood of adverse events being listed on your credit file within the coming year. Events can include court judgments, bankruptcies, insolvency or defaults.|
How is my score calculated?
Your credit score is determined by the information that's included in your credit report.
- Your personal information. Your age, how long you've been employed and the time you've been at your current address is used to calculate your risk.
- Age of your credit report. The length of time your credit report has been active has a direct effect on your credit score.
- Type of credit providers. The type of credit providers you've applied for and held accounts with will also impact your score. For instance, if you've held an account with a bank it will carry a different level of risk than a store finance provider.
- What credit you've held and the credit limit. Your score will largely be determined by the risk associated with the type of credit requested in your loan application. The credit limit or loan amount you request will also determine your credit risk index and affect your final score.
- The number of credit enquiries listed on your file. Any time you make an application for a loan, credit card or utility account, it will be added to your credit file. Frequent applications for credit raise your risk index and lower your credit score.
- The pattern of your credit enquiries and shopping over time. Many credit enquiries within a short period of time may be a red flag to lenders. Defaults and other serious infringements in your credit history also affect your score negatively.
- Default information. If you have overdue debts, serious credit infringements or clearouts it will negatively impact your credit score.
- Court writs and judgements. Any listing indicating a court writ or default judgement will decrease your credit score as it's an indicator of increased risk.
What you need to do to improve your credit score
Improving your credit score starts with understanding where you're at with your finances and your credit, and then working to improve them. As your finances improve your credit score will improve with it. Here is a quick guide to improving your credit and financial position:
- Order your credit score and credit file. These two usually come together, or you can order them separately. You can receive your credit file for free once a year and you can receive your free credit score from finder.com.au. When you know your score, check what credit position you fall into – excellent, average, below average, etc. – and you will have a good idea of how you fare to the rest of the population. Your credit file can then give you a more in-depth understanding of your financial position so you can make actionable changes.
- Check your file for high-risk listings. Listings can include multiple credit file in a short space of time, high credit limit credit cards, multiple loan accounts and of course, bad credit listings such as defaults, serious credit infringements and bankruptcies.
- Identify listings that you can improve. No two credit files are the same and so the same improvement process will not be the same for everyone. However, there are a few ways you can improve your credit score. For instance, if you have a high credit limit credit card that you aren't using, you can consider lowering it. If you have multiple personal loans and credit card debt, you can consider consolidating it. If you are unsure how you can improve your position, there are professionals, such as The Credit File Experts, that can assist. Just follow the link at the top of this page.
- Keep an eye on your score and your credit. The most important step to improving your credit score is keeping an eye on it. Make sure you are in a good credit position before you next make an application to ensure you're approved.
- Redirect your bills when moving. To prevent your bills from being listed as defaults when you change your address, ensure that you provide your new address to banks, utility companies, phone companies and other lenders so that your bills are redirected to the new address.
- Pay your bills on time. Missed or late payments on some credit contracts (for example, home loans, personal loans and credit cards) can affect your credit score negatively, so ensure that you make the minimum payments on all your accounts on time.
- Consolidate your debt. Consolidating several loans into one can make it easier to manage repayments. It also helps you to save on fees.
- Check your credit report regularly. This will help you monitor your credit applications so that you flag any applications or enquiries made as a result of identity theft.
- Do your credit homework. To avoid getting into unnecessary debt, only apply for credit when you need it, and remember to arrange for a repayment plan that suits you to avoid missing repayments. It also helps your credit score if you space out your credit inquiries.
Why is it important to check my credit file?
Checking your credit file regularly helps ensure that everything is in order in your credit report and that your credit score remains healthy. You should order and review your credit report to:
- Check that all your personal details are entered correctly in your file
- Ensure that all loans and debts listed are actually yours and that you have not been a victim of identity theft
- Check for incorrect defaults or debts listed twice and request corrections or for notes to be added to the report.
How can I deal with incorrect listings on my credit file?
You have the right to update your credit report in order to remove outdated or incorrect listings.
If you discover errors about your personal details, including if adverse listings have been entered twice, you should contact the credit reporting agency from which you ordered the report and request them to make amendments.
Other errors, such as wrongly listed defaults, can be dealt with by contacting a credit repair company who can act on your behalf to investigate and help remove adverse information from your report. There are also free ombudsman services for additional help.
Frequently asked questions
How does my credit score impact my credit application?
Lenders depend on credit scores from top credit bureaus, along with your credit report, to determine whether you are likely to default on a loan or credit card. A bad credit rating indicates the possibility of an adverse event occurring in your credit file in the coming months, therefore making lenders reject you for credit or charge you extra for the credit to cover their risk.
Can creditors make erroneous listings on your credit report?
Yes, creditors tend to sometimes list a default onto your file when in fact the debt is in dispute, or list defaults without giving you the required notice that your account is due. This is why you should monitor your credit file yearly and dispute any wrong listings with the help of a credit repair agency.