Looking to finance your home or purchase a brand new car? The chances are you’ll need to borrow some money in order to do so. Knowing and understanding your credit score can give you a leg up when negotiating with banks and brokers, potentially saving you thousands.
Read on to find out all you need to know about your credit score and how it can help with your future financing plans.
What is your credit score?
Your credit score is a number represented on a scale which reflects the strength of your credit file. Banks and financiers can use your credit score to help determine whether you satisfy their criteria for a specific lend. Along with other factors such as your income, liabilities, age and work stability, your credit score can provide a quick and easy way for a lender to summarise your credit history.
In Australia, there are multiple organisations that provide a credit score such as Equifax and Dun & Bradstreet. For the purpose of this guide, we’ll refer to Equifax who are currently the biggest organisation in the space.
Why is it important?
Everyone should understand their credit score as it can have serious implications on your future. If you plan to buy a house, purchase a car, apply for a credit card or even purchase a mobile phone plan, your score will be assessed. Lenders and credit providers will use your credit score along with other factors such as your credit history, income, liabilities, etc. when assessing your eligibility for credit.
By understanding your credit score and taking steps towards building a strong credit file, you will put yourself in a position to negotiate the best financial arrangements when the need arises.
Obviously, it bodes well to keep your credit score intact to enable you to achieve your financial goals.
How is your credit score calculated?
Your credit score is calculated by a credit reporting agency such as Equifax or Dun & Bradstreet. With slight variations depending on the agency, they will compile information from your credit history and apply to an algorithm to generate your credit score. Using Equifax as an example, they categorise your score into 5 bands – Below average, average, good, very good and excellent. More on that later.
The age of your credit file
If the credit file is relatively new this can reduce your score
The amount of credit enquiries
Multiple credit enquiries within a short period of time
Type of credit
Secured loans such as a mortgage or car loan will be looked upon more favourably then unsecured loans and in particular, short term cash loans
Late or outstanding loan repayments
It's a good idea to make your loan repayments on time or in advance.
Understanding your credit score
Most credit providers use a similar scoring structure to Equifax. The cross over points will vary slightly but the basic concept and ranking system is very similar. The score will range from between 0 -1200, the latter being the highest.
Perceived to be high risk and likely to default within the near future. Also highly likely to fall behind on repayments
A step up, though still likely to receive an adverse listing on their credit file within the next 12 months. Likely to fall behind with some repayments.
Less likely to default or receive an adverse listing.
Stronger applicant. Unlikely to default or receive an adverse listing. Likely to pay on time.
The strongest applicant, highly unlikely not to receive an adverse listing. Often asset backed, armed to negotiate the best possible rates.
How to check your credit score
Luckily checking your credit score is free and easy. All of the major credit reporting agencies in Australia offer to provide your credit score for free. Simply Google “free credit score” or you can use the links below
You will be required to provide identification information such as name, address and driver’s licence number. Most providers will supply within 10 days. If you need to access quicker, you can always pay a small fee.
It’s a good idea to check your credit file every 12 months to make sure your details are up to date and your score is in good shape.
How is a credit score different to a credit report?
As mentioned above, a credit score is a numerical value applied by reporting agencies in order to quantify the strength of an applicant’s credit worthiness. In order to do this, they compile information sourced from your credit file and apply to their respective algorithms. A credit report is the compilation of credit data accrued over the life of your credit activities.
Types of listings to avoid on your credit file
Defaults are the most common adverse listings. An overdue debt can be become a default when the debt has been outstanding for at least 60 days and the following steps are followed by the credit provider. After 60 days the credit provider or (debt collecting agency acting on it’s behalf) will send written notice in the mail to the most recent address listed on the account. After 30 days they can send a second notice with payment terms of 14 days. If not paid, they can list the outstanding debt on your credit file as an unpaid default.
A debt agreement is a type of personal insolvency which involves a legally binding agreement between a creditor and the applicant. The aim is to resolve the outstanding debts over a set period of time, within the individual’s financial capacity. They are commonly referred to as a Part IX debt agreement as they fall under the Bankruptcy Act 1966. Although it can be sold as a pragmatic way to consolidate debts through a payment plan, credit assessors view the Part IX debt agreement in a very similar way as they do Bankruptcy.
Bankruptcy is the worst type of adverse listing you can have on your credit file. It involves a legal process to release an individual from their debts due to the fact they have no means of fulfilling their financial obligations. The period of bankruptcy lasts for three years. At the completion of the three years, a further two-year period of discharged bankruptcy will follow. Having a bankruptcy on your credit file will seriously hamper an individual’s efforts to obtain finance.
A court judgement is a legal decision handed down by the court that requires an individual or organisation to pay an outstanding debt to either a credit provider or entity that is deemed to be owed money. A court judgement will usually remain on the individuals credit file for 5 years.
7 tips to improve your credit score
Pay your bills on time
This one’s a no brainer. With the advent of positive credit reporting, repayment history will be stored on your credit file for up to 2 years. Make it a habit, get used to paying your bills on time.
Reduce your credit enquiries
Having multiple credit enquiries within a short period of time is not looked upon favourably by credit assessors and will negatively impact your credit score. Credit providers perceive frequent activity as desperate, irresponsible and risky. Only apply for credit once you’ve done your research and you’re ready to move forward
Reduce your credit limits
Having high credit limits on credit cards and overdraft accounts can have a negative impact on your credit score
Reduce your outstanding debt
Having high debt can be seen as a risk to credit providers. Reducing your outstanding debt will not only improve your credit score, it can release the financial burden and leave you with more money in the pocket.
Regularly check your credit file
Staying up to date with your credit file will allow you to monitor your activity and keep you in the mindset of maintaining a healthy credit rating.
Utilise the services of a credit repair agency
If you find that you have an adverse listing on your credit file, especially if you feel the listing is unfair, you can consult a company that specialise in getting them removed. Credit repair agencies use their expertise to determine whether any of your adverse listings have been reported outside the legislative guidelines. If this is the case, they can get them removed.
Set up payment reminders or direct debit accounts
This can be a great way of staying in control of your repayments. By putting these safe guards in place, you can greatly reduce the risk of falling behind in payments. Just make sure you always have sufficient funds in your account to cover any direct debits.
Do you have a low credit score? It’s not the end of the world
It can be disheartening to find out that your credit rating is below average, but all is not lost.
There are many financiers in the market that specialise in providing finance to individuals with bad credit. These types of loans can often attract slightly higher interest rates and repayments but they can be a great way to get into the market and rebuild your credit file. If you make your payments on time, providing a statement of account to a prime/good credit financier will greatly enhance your chances of being approved for your next loan.
It’s common for people with bad credit to start with a bad credit loan then refinance once their credit score and repayment history has improved.
The good news is your credit score is not fixed. It’s constantly being updated with information which will impact your score. Take control of your finances and start rebuilding your credit rating.
What is Comprehensive Positive Credit Reporting?
As of 1st July 2018, Comprehensive Credit Reporting has been mandatorily implemented into the credit reporting process of the big four banks in Australia. Previously, credit reporting in Australia was centred around negative reporting whereby listings such as bankruptcies, defaults and court judgements were filed.
Comprehensive Credit Reporting, also known as positive reporting, will enable banks to track additional information such as repayment history and consumer credit liability.
This will give credit providers a better understanding of your financial profile.
Type of information reported:
Who can access my credit report?
The Australian credit reporting laws have safeguards in place to restrict who can access your credit information. The following types of organisations can gain view your credit file under varying levels of access:
- CRB’s or Credit Reporting Bodies such as Equifax and Dun & Bradtreet
- Credit Providers such as banks, credit unions, credit/store card providers, cash loan lenders and mortgage insurers
CRB’s and credit providers have greater access to repayment history and other information provided by positive credit reporting.
Other credit providing entities can gain limited access to your credit file:
- Utility providers (electricity, gas)
- Telco companies
- Retailers that provide credit for goods and services
How to get a default removed from your credit file?
Firstly, you will need to obtain a copy of your credit report and review the listings. It’s not uncommon to find a listing that you were not aware of. If you feel that the listing is unjustified, you can lodge a dispute with the credit provider.
At this point the credit provider will review the request and if they deem that the listing is unfair, they can remove the default from your file. If they reject your request and you think the default has been unfairly listed, you can engage the services of a credit repair agency.
Is a small default the same as a large default?
Whilst there is minimal information available on how the size of a default will impact your credit score, it can have real implications if you are applying for finance. Most credit providers in the prime space will show leniency if the default amount is paid and less than $1,000.
For instance, an $800 default from a telco, if paid, can be overlooked by the analyst if the rest of the profile is strong. If the applicant is either asset backed (owns property), earns a high income, stable employment, etc. than the chances of approval will increase. On the other hand, a default over $1,000 relating to a financial product such as a credit card or loan will be viewed more critically.