Have you ever wondered why some people get approved for loans at a great competitive rate while others struggle?
Well, the secret often lies in just a few digits: your credit score.
What’s a credit score?
A credit score is a number that lenders use to evaluate your creditworthiness. It’s derived from your credit report and is used by lenders to decide how risky it is for you to borrow money from them based on your past financial behaviours.
Your credit score affects not just the likelihood of being approved for credit, but also the interest rate you’ll be offered. A higher score can lead to better interest rates, which means borrowing costs you less in the long run.
What’s the difference between a credit score and a credit report?
While they sound similar, a credit score and a credit report are not the same thing.
Your credit score is a number that summarises your credit risk based on the information in your credit report at a particular point in time.
Your credit report is a detailed record of your credit history, including your borrowing and repayment history, the types of credit you’ve held, and information about any defaults or credit infringements.
Do you only have one credit score?
No, you don’t just have one credit score. In fact, you have several.
That’s because there are three credit reporting bodies in Australia: Equifax, Experian, and Illion.
Each of these bodies scores you slightly differently based on their unique algorithms and the specific information they have on file about you.
You have the right to request a free copy of your credit report every three months from each of these agencies.
It’s a good idea to do this at least once a year to make sure your information is accurate and up-to-date.
What’s a ‘good’ credit score?
In Australia, credit scores typically range between 0 and 1,200 or 0 and 1,000 depending on the credit reporting agency.
As such, understanding what constitutes a ‘good’ credit score can be tricky because it varies depending on the credit reporting agency.
Moreover, lenders consider various factors before deciding to offer you credit. Therefore, if one lender rejects your application, another might approve it.
That said, generally, a score between 661 and 734 is considered ‘good’ at Equifax, while a score between 735 to 852 is ‘very good’, and 853 or above is ‘excellent’.
At Experian, a score between 625 to 699 is considered ‘good’, 700 to 799 is ‘very good’, while 800 and up is ‘excellent’.
At Illion, a score of 500 to 699 is ‘good’, 700 to 799 is ‘great’, and 800 and above is ‘excellent’.
What’s a ‘bad’ credit score?
On the flip side, a ‘bad’ credit score is one that falls on the lower end of the credit scale.
Equifax defines a score of 459 or lower as ‘below average’ while at Experian it’s 549 or less. At Illion, anything under 300 will be considered as a ‘low score’.
A lower score suggests to credit providers that you might be a high-risk borrower, which can result in higher interest rates or, even, a rejection on your loan application.
Can you improve your credit score?
Yes. Improving your credit score is all about proving your reliability as a borrower. Here are some practical steps you can take if your score is on the low side:
- Pay your bills on time: Late payments can have a negative impact on your score. So set up reminders or direct debits to ensure you always pay on time.
- Reduce your credit card limits: Even if you’re not using the full limit of your credit cards, lenders consider the total potential debt. Lowering your limits can improve your score (as can closing unused credit accounts altogether).
- Limit new credit applications: Each application can temporarily affect your credit score, so apply only when necessary.
- Check your credit reports for errors: Sometimes, your credit report might contain errors. Regularly reviewing your credit report can help you spot and rectify these mistakes, helping you improve your score.
Improving your credit score takes time and patience, but it’s one of the most beneficial financial moves you can make.
Peter Cole is the owner of Clear Credit Solutions, a credit repair agency that has won the ‘Credit Score / Credit Repair Services’ category in the annual ProductReview Awards for five consecutive years.
