Q. What is a credit score?

A. When you start researching home loan information, you’ll read a lot about unfamiliar terms such as loan-to-value ratios, unconditional contracts and credit scores. You may have also discovered that your credit score will have an impact on your capacity to borrow for your home loan. If you haven’t yet taken out any kind of loan from a bank or similar lender/financial institution then it’s possible you don’t know what a credit score is, so let’s tackle that first. Exactly what is a credit score?

Put simply it is a three-digit number that represents your financial history with credit.

The digit usually ranges from 300 to around 850/900, but it’s possible to get higher than this (up to 1200). It’s also important to understand that different credit reporting agencies will have their own method of calculating a credit score. The figure from one agency won’t necessarily be the same as the figure calculated by another agency.

Your credit score will be based on things like how well you pay your bills – so if you’re frequently late on bills such as telephone or utilities this will potentially drag down your credit score. It’s also determined by how much debt you have, how well you manage your credit cards, and how many times you’ve applied for credit.

Credit reporting bureaus (well-known ones in Australia include Illion, Experian and Equifax) use credit reporting data to calculate an individual’s credit score. A credit score considers the following:

• Your repayment history of loans and other credit facilities (specifically if you have missed minimum monthly repayments)
• Any defaults
• The types and numbers of credit limits
• The dates credit facilities were opened and closed
• The number of recent credit enquiries (like credit card, store card or loan applications)
• The types of credit applied for

Credit scores typically range from 0 to 1200. Generally, the higher the credit score, the better.

As of 1 July 2021, banks are now required to provide a holistic picture of your credit history – showing both positive and negative data. This means that positive credit behaviour can balance out issues you’ve had in the past.

So, if you’ve had a couple of credit issues previously, then all is not lost – you can work to create positive credit activity that shows you’re a creditworthy borrower.

Q. What are the reasons for a lower credit score?

A. It helps to know the reasons why you might have been declined for a loan or credit card. Some common things that might lower your credit rating are:

missed loan repayments
missed or late credit card payments
exceeding a credit card limit
multiple recent credit enquiries
previous bankruptcies
registered credit defaults
part 9 or 10 debt agreement

Q. What are the impacts of a bad credit score?

A. Unfortunately, a low credit score can mean that some lenders will not approve a loan application. This is because the information on your credit report tells the new credit provider how you’ve treated existing and past debts, which gives them an indication of how you’re likely to pay back the new debt. This is called ‘creditworthiness’.

Some lenders might accept your loan application – but they could apply a higher interest rate to your loan, because you represent a higher risk.

Q. What are the impacts of a bad credit score? How long does bad credit last in Australia?

A. How long ‘bad’ credit lasts for is hard to quantify, as different elements are recorded for different time periods.

Any credit issues (such as defaults) stay on your credit report for five years from the date they were recorded. This means that if you defaulted on a bill, it will still be reflected on your credit score for five years.

Meanwhile the previous 24 months of repayment history from your open and recently closed credit accounts is recorded on your report. Credit enquiries (for example, applying for credit cards or loans) are split into two buckets; recent and historical enquiries.

Recent enquiries are classed within the past three months, while overall enquiries are recorded for five years.

You could ask your financial institution to reduce your credit card limit, this will cap the amount you can spend and keep your level of debt under control. It’s always better to get into the habit of managing your money, rather than allowing credit card debt to grow.

If you have outstanding debt more than one credit card, you should consider taking action immediately to address the problem.

Q. What is an example Equifax Score?

A. It is crucial to understand what a good credit score is so here’s a summary of what your Equifax Score indicates:

• Below average to average (0-509): It’s more likely an adverse event will be recorded on your file in the next 12 months. You are in the bottom 20 per cent of Equifax’s credit-active population.
• Average (510-621): This score suggests that it’s likely that you will incur an adverse event in the next 12 months. Your score places you in the bottom 21 to 40 per cent of the credit-active population.
• Good (622-725): Adverse events are less likely to be recorded for the next 12 months. You fall in the mid-range (41 to 60 per cent) of Veda’s credit-active population.
• Very good (726-832): Unfavourable events are unlikely to be recorded onto your credit file within the next 12 months. Your score places you in the second-highest percentile range of the credit-active population (61 to 80 per cent).
• Excellent (833-1200): Adverse events are highly unlikely to happen within the next 12 months when compared to the average Australian. The odds of no adverse events occurring on your credit file in the next 12 months are five times better than the population average and you are in the top percentile range (81 to 100 per cent).

Most reporting agencies have a similar structure in that the higher the number, the better. Experian scores are a maximum of 1000, with the Good range starting around 625 – 699, before moving to Very Good (700 – 799) and Excellent (800 – 1000). Illion scores are almost identical, ranging up to 1000 with similar bands for Good, Very Good and Excellent.

Q. How can I keep my credit score healthy?

A. Be smart when applying for credit

Your credit report will show when and how many times you’ve tried to access credit, and this can impact your credit rating. Keep your credit score healthy by:

• Only applying for credit when you need it
• Doing your research beforehand – find out when a credit enquiry will be completed on your credit file
• Not borrowing more than you can handle
• Prioritising repaying existing debt before applying for more credit
• Accepting a smaller credit limit whenever possible, and turning down credit limit increases that you may be offered
• Speaking to your lender if you are struggling to make repayments

Do an annual credit health check

You can access your credit score for free every three months through credit reporting bodies Illion, Experian and Equifax.

This could help you:

• Plan ahead so you’ll be in a good position when the time comes to apply for a loan or credit card. If your credit score needs to improve you can work on improving it before applying.
• Contact credit reporting bodies Illion, Experian and Equifax if there are errors in your credit report. You can get any errors fixed for free.
• Be alert to fraud. Check your credit report to ensure that no one is using your name or identity to take out loans or other credit.
• If an error occurs and has been amended by a provider, ensure you apply for another free report due to changes that were made before re-applying for finance to ensure your report has been updated.
• Credit reporting agencies MUST give you access to your consumer credit report for free once every three months.
• You can also request a copy if you’ve been denied credit within the past three months, or you’ve asked for the information on your credit report to be corrected.
  Each agency has very clear instructions on its website about how to do a credit score check, so visit those websites for simple step-by-step instructions for getting your credit score or credit report.
  To find out more about these agencies visit this government website: https://www.oaic.gov.au/privacy/credit-reporting/access-your-credit-report/