Achieving a good credit score is essential if you care about your overall financial health. When you have good credit, you increase your qualification odds for credit cards and receive some of the best interest rates on various credit products. But building good credit doesn’t happen overnight. Instead, you need to consistently practice responsible credit behaviour, such as paying bills on time and limiting debt.
How to build credit
Building credit in Australia involves several key steps and responsible financial practices:
- Understand what a credit score is
- Learn how credit scores are calculated
- Pay bills on time and in full
- Maintain a low credit utilisation rate
- Limit new credit applications
- Ensure you have no late payments on accounts
- Clear any defaults or negative listings from your credit report
What is a good credit score?
Australia uses a Comprehensive Credit Reporting (CCR) system, which provides lenders with detailed information about how individuals manage their credit. Your credit score is calculated based on factors such as payment history, credit utilization, and length of credit history. It is also possible to have a good credit report but a bad credit score.
Your credit score is three-digit number, ranging from 300 to 850, that is the result of an analysis of your credit file. Lenders use your credit score to judge your potential credit risk and ability to repay loans. Credit score ranges vary based on the model used and the credit bureau that pulls the score. The three main credit bureaus in Australia are:
- Equifax
- Illion
- Experian
Credit scores are used in 90% of lending decisions, so those ranges are listed below, using estimates from Equifax.
- Very poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Excellent: 800 to 850
How are credit scores calculated?
Credit scores are calculated by looking at five key factors. These factors include:
- Payment history (35%): Whether you’ve paid past credit accounts on time
- Amounts owed (30%): The total amount of credit and loans you’re using compared to your total credit limit, also known as your utilisation rate
- Length of credit history (15%): The length of time you’ve had credit
- New credit (10%): How often you apply for and open new accounts
- Credit mix (10%): The variety of credit products you have, including credit cards, instalment loans, finance company accounts, mortgage loans and so on
How to improve and achieve a good credit score
As you know, having a good credit score is imperitive in Australia for a number of reasons. To maintain and improve your credit score:
- Pay more than the minimum amount due on credit cards each month.
- Consolidate loans and credit cards to reduce overall credit.
- Regularly review your credit report and score to track progress.
- Demonstrate consistent responsible credit behavior over time.
By following these practices, you can build a strong credit profile in Australia, which can lead to better loan terms and increased financial opportunities in the future.
