Your Credit Score

How do Credit Scores work? And how to find out yours!

Ah credit scores – most adults have one but many of us still have questions about how they work, and how to find out what our own credit score is.

Today we’ll answer all your frequently asked questions and provide some pointers about how to maintain a positive credit score.

Your credit report is a history of your credit-related financial information and includes details from the past 5 years. In December 2013, financial institutions were granted the right to share your credit liability and repayment history, including records of whether payments were made on time (or not).

Your credit report includes details of:

• Credit enquiries and applications

• Monthly repayment history

• Overdue debts and credit accounts

• Payment defaults (also known as clearouts)

• Account open and close dates

• Bankruptcy

• Court judgements and court writs

• Commercial credit information

• Public record information

Your credit score is derived from this credit report and is used by lenders to assess your credit risk and determine whether or not to approve you for a loan.

The data in your credit report is mathematically assessed to calculate a rating from 0 to 1,200, which tells lenders the likelihood of you defaulting on credit payments in the next 24 months. The higher your score, the lower your risk, with a score of 550 signifying an average risk.

Factors affecting your credit report

Understanding the factors that affect your credit report and subsequent credit score is critical to ensure you make the right financial decisions and keep your score as healthy as possible. Having a poor credit score could stand in the way of you buying your dream home, a bigger car for your growing family or accessing credit in the case of an emergency.

A score of less than 500 will severely affect your ability to secure finance and this will be a black and white decision for lenders. Unfortunately, if your credit score is too low, no lender will be able to offer you credit, but by being well-informed about how to maintain a high score, you can protect yourself from nasty surprises down the road.

Let’s look at some common questions about credit scores so you can get the facts about what really affects your score.

Does paying bills affect my credit score?

Yes and no. Paying bills on time will not add to your credit score, as utility providers are not able to add information about timely ongoing repayments. Having said this, if you fail to pay a bill at all, providers can list a default on your file. A default is usually defined as a payment over $150 that is 60 days or more overdue. So paying bills on time is the best option to avoid diminishing your credit score, but you won’t get any extra brownie points for doing it.

Does making multiple credit applications harm my score?

Yes. You might think applying for different loans or credit cards and then choosing one to keep is fine as long as you cancel or abandon the ones you don’t use. The truth is, making multiple applications in a short time frame is considered behaviour that makes you look like a credit risk to lenders. For example, if you are shopping around for mortgages on a new home, securing preapprovals from multiple lenders in a short space of time can damage your credit score and may prevent you from being able to buy a home at all. The information you need to make the best decision and get a good deal is freely available, so there’s no need to make multiple applications at once. Pick the best option based on the information you have and only make an application when you’re really sure. If you need help deciding, chat with a trusted expert like us.

If I make a partial payment on a loan by the due date, is this still considered on time?

Most likely not. Depending on the type of loan, different repayment structures apply. You may be required to make a series of repayments each month, a minimum monthly repayment or another specific amount within a specific timeframe. By missing one of your repayments within a month, not making the minimum monthly repayment or making only a partial payment of the agreed amount within the agreed timeframe, this will be considered overdue and can tarnish your credit rating.

So how exactly is my credit score calculated?

Not even lenders know the secret formula to how credit scores are calculated, but there are a few ways you can help keep your credit score stay as high as possible; pay bills and loan repayments on time, do not overuse credit and limit the number of credit applications you submit.

How to access your credit report

You will have a credit report if you have applied for credit in the past including credit cards, personal loans, residential loans, a hire purchase or contracts with a phone, internet or utility provider.

You can access your personal credit report at www.mycreditfile.com.au. Charges may apply in some cases but it is usually a free service.