Updated: Apr 13
Understanding Credit Scores
If you have previously signed up for a phone plan or applied for a loan, you may have heard of the term ‘credit score,’ but what does this mean?
A credit score is a number used by financial institutions and lenders to understand how responsibly you use credit and determines if they should lend you credit or money. Maintaining a very good or excellent credit score is important to show banks that you are a good ‘risk’ for credit card, loan, and in other forms of credit.
Credit Score Ratings
In most cases, financial institutions have their own methods of running a credit check, but you can request a credit check and access your report through any one of Australia’s three reputable credit reporting bodies: Illion, Equifax and Experian. The following table shows each bureau’s credit score ranges:
Credit Score Range
Credit Score Factors
Banks consider people with high credit scores as ‘low risk borrowers,’ which can open more opportunities to negotiate lower interest rates. Alternatively, having a negative, or low credit score, hinders ones ability to apply for loans and other credit products. So what factors impact someone’s credit score and how?
Most financial experts agree the main factors influencing credit scores are:
How often credit applications are made
Length of Credit profile and;
History of bankruptcy (if applicable)
Repayment history evaluates how often credit and bill payments are made on time. It is important to keep track of monthly repayment schemes as even one missed repayment can severely affect a score for between 2-5 years.
Your personal debt may include household, personal, family related loans. Some types of loans that can impact your score include car and home loans. Alternatively education loans like HECS have minimal impact on your rating since it uses an ‘index’ rate as opposed to an interest rate. Having a diverse portfolio shows lenders how well you manage debt, and can help increase chances of a loan approval.
A smaller factor that may influence a credit score is the length of your credit history. As your credit profile increases over time, it can help improve your score.
How to improve your credit score
The above factors provide a rough guideline on what affects credit scores, so how can you increase and improve your score over time?
Firstly, it is encouraged to check your score at least once a year. All three credit reporting bodies allow you to check your rating every three months. Checking your profile is the first step towards improving your score. Analysing your credit report is useful in identifying any inaccurate records, suspicious activities or signs of identity theft. Rectifying these problems will mitigate any risks and/or potential harm. Your profile will also help with understanding what loans you can apply for, what steps to take towards getting loan application approvals, and why you may have been denied any previous loan applications.
Secondly, all factors that influence credit scores should be positively impacting your profile. Ensure any bills and repayments are made on time, pay down revolving credit as much as possible, and keep on top of all finances.
In achieving these factors, it may be useful to see a financial planner or advisor to help meet monetary needs, achieve financial goals and improve your financial health. Alternatively, other tactics to manage finances may include:
Creating a planner and filing system to keep track of bills and spending
Setting alarms and alerts for billing due dates
Automating bill payments from bank accounts; and
Charging all monthly bill and loans repayments to a credit card so that these are paid off at the same time.
The Newstead Group welcomes any questions or queries you may have. Book a free chat through our website to speak with one of our financial experts today: