GuidesCredit Score Guide
Australian Credit Score Explained
You’ve probably heard of credit ratings and scores, but do you know what they really are and how they can affect you?
5 min read
What is a credit score?
Also known in Australia as a credit rating, a credit score is a number used to represent your reputation as a borrower. Calculated based on the information included in your credit report, this number helps lenders determine if they are willing to lend money to you, and, if they are, your credit limit as a borrower, the interest rates they’ll offer and any other applicable terms.
If you choose to find out your credit score, you’ll be given a number that sits somewhere between 0 and 1,000 or 0 and 1,200, depending on the credit bureau used. As a general rule of thumb, the higher the score, the better your credit rating and the more credit-worthy you’ll be considered by financial institutions.
How can I check my credit score?
Not only is it free to check your credit score, but it is also easy to do so. SocietyOne allows you to check your credit score for free without impacting your credit score. It only takes a minute to check your score.
Have your driver’s licence or proof of age card handy, as it helps with verifying your identity and accessing your credit score information.
How is my credit score calculated?
An algorithm is used to calculate your credit score, analyse your credit history, credit profile and past credit applications to get a better understanding of your behaviour as a borrower.
1. Credit history
Your credit history is analysed for patterns that could include:
The presence of high-risk indicators
Defaults, bankruptcies, court judgements and credit infringements can all negatively impact your credit score.
The type of credit providers you’ve submitted applications to
The degree of risk can vary depending on the type of credit provider, with payday loan applications viewed in a different light to loans from a bank.
Repayment history of your credit accounts
Consistent on-time repayments can contribute positively to your credit score.
2. Credit profile
Your credit profile is assessed based on factors such as:
The age of your credit history
Holding a shorter credit history often represents a different level of risk to one that is much longer.
Your personal details
These may include your age, duration of employment and how long you’ve lived at your current address.
3. Credit applications
Your previous credit applications can also impact your credit score, with some the following considered:
The amount and type of credit you’ve applied for in the past
Each type of credit attracts a different amount of risk.
A high number of credit enquiries
Having fewer and more infrequent credit enquiries is typically preferred.
An unfavourable distribution of credit enquiries
Recent credit enquiries are often considered to have different risk associations than much older credit enquiries.
It is important to note that there are three different national credit reporting bodies (CRBs) that operate in Australia, including:
- Equifax Australia
Different CRBs collect information from companies that choose to report to them and use their own methods to calculate a credit score. For example, Experian and Illion have a score range of 0 to 1000, while Equifax Australia has a score range of 0 to 1200. This means your credit profile may appear differently between credit score providers.
SocietyOne’s credit score calculations are powered by Experian, meaning that your score may differ from those powered by Illion and Equifax. All CRBs listed above allow you to order a free credit report once every 12 months, making it easier to get a better idea of your credit history across all CRBs.
Check your credit score for free in under 1 minute
What is Comprehensive Credit Reporting (CCR)?
Historically, credit reporting has focused primarily on negative credit events, but a newer system, known as Comprehensive Credit Reporting (CCR), ensures that the positive actions you make, such as making monthly payments on time, are noted too. Under this system, lenders are required to share more data, providing a more accurate and comprehensive picture of your credit history than ever before. This approach may assist those with a thin or short credit history and reduce the impact of a single negative event.
Previously, only data about credit enquiries, credit provider names and overdue credit account details had been recorded in consumer credit files. Now, additional information such as the type and amount of credit applied for, credit limits for each account and repayment history are included.
With more information available to CRBs, people may see an improvement in their credit score if they have been good with their repayments.
What can negatively affect your credit score?
Missing a payment or two
While it may not seem like a big deal, missed payments can reduce your credit score and will remain on your file for 2 years.
Having black marks on your accounts
Bankruptcy, court actions, defaults, having debts with specialty finance (debt collectors) or credit infringements are black marks on your accounts, which can significantly impact your credit score and can stay on your credit file for 5-7 years.
Making too many applications in a short period of time
Every time you apply for credit an enquiry is recorded which remains on your credit report for five years. If there are too many enquiries recorded in a short period of time, it could raise a red flag to your potential lender that your finances are in poor shape.
Tips for improving your credit score
Get on top of your bills & debts
Paying your bills on time each month can help to boost your credit score, using your past behaviour as an indicator of how you’ll act in the future. Doing things such as setting up direct debits, building a budget and letting your creditors know ahead of time if you think you’ll be unable to pay can all help you keep on top of your payments.
Keep your credit enquiries to a minimum
Every time you apply for credit, a credit enquiry is left on your credit report. Having too many credit enquiries in a short period of time can appear to potential lenders that you are desperate for credit or struggling to get approved, even if you’re in good financial standing. To avoid this issue, always do your research and only proceed with an application when you are sure you are ready to apply. Many lenders, such as SocietyOne, also offer quotes that won’t impact your credit score.
Check your credit report for any inaccuracies
Taking some time to check your credit report can help you find details that might be negatively impacting your credit score. Take a look at reports from all three CRBs (Experian, Equifax, illion) to see if anything stands out. If you do find anything that doesn’t seem quite right, clarify it with your creditors or find out more from the CRB.
This may sound ridiculous, but doing nothing can actually help your credit score. Each day that passes without you jeopardising your file gets you a step closer to the expiry dates on credit inquiries and black marks that may be negatively impacting your score.
What are the benefits of having a good credit score?
Improving your chances of loan and credit card approval
While it doesn’t necessarily guarantee that your application will be approved, having a positive credit history can put you in good stead when submitting your next personal loan, home loan or credit card application. It should also be mentioned that while your credit score is an important factor in the approval process, it’s not the only one considered, with lenders taking other factors, such as your ability to service a loan or credit card, into account.
Get a better deal on loan interest rates
With a good credit score and a proven track record, you’re in a much better place to get a better deal on your interest rates, saving you money in the long-run. It’s important to note that risk-based interest rates are more common among personal loan products than other lending products, such as home loans or credit cards.
Making it easier to reach your life goals
Whether it be a wedding, car, home improvements or even a dream holiday, having a good credit score provides you with far more flexibility when it comes to making large purchases, especially if you lack the initial funds to pay for something in full.