What is a credit score and how do you check it?

Your credit score is an important part of your financial profile. It reflects how well you’ve managed your debts in the past, including credit cards, personal loans, and other forms of credit.

It might sound daunting, but as well as assessing your financial responsibility, credit scores also offer a great way to stay on track and in control of your finances, here’s how. 

What is a credit score?

A credit score or credit rating is used to determine the level of risk that you, the borrower, pose to a lender, like a bank. When considering whether to lend you money – for a personal loan, a home loan or via a credit card account, for example - financial institutions and other organisations want to know if you’re financially responsible. They determine this by looking at your credit score.

Your credit score is a number that is calculated based on your financial history. In Australia, your credit score will be a number between zero and 1200, depending on which credit reporting agency you use. The higher the score, the less risky you’re considered, and the more likely you are to get credit.

If you’re rated as low risk, you have a higher chance of your loan or credit being approved, and you might be able to borrow a larger amount of money. On the other hand, a lower score may impact your ability to get credit or a loan. 

How is your credit score calculated?

Your credit score is calculated using your credit report, which is a file of your financial history. 

In Australia, there are three main credit reporting agencies: Equifax, Experian or illion. Each credit reporting agency uses slightly different methods to calculate your credit reports and score, but five fundamental factors that typically affect your credit score are: 

 

1. Repayment history
   This is your record of making repayments on time, including things such as rent, electricity, credit cards or loans. 
2. Credit utilisation ratio
   This is how much you’ve borrowed compared to your total available credit. 
3. Length of credit history
   A longer credit history may improve your credit score, as there’ll be more data available to assess your ability to manage credit over time.
4. The number of times you’ve applied for credit
   This may be for credit cards, personal loans or mortgages.
5. Bankruptcy or court rulings
   Any defaults on loan repayments, bankruptcies, or court judgements against you could significantly lower your credit score. 

How to check your credit score

You can contact any of the credit reporting agencies Equifax, Experian or illion to receive a free credit score check, or you can also use a third-party service such as Finder or Canstar to receive a free credit report.

You can get a copy of your credit report and score every three months free of charge, and your report includes your credit rating. This is the band in which your credit score sits – low, fair, good, very good and excellent.

It’s recommended you check your credit report every year to make sure it’s accurate, especially if you’re planning on applying for credit.

Checking your credit report 

Once you receive your credit report, be sure to review it for accuracy. Check your personal details are correct and all loans and debts listed are yours.

If you uncover wrong or out-of-date information, unfamiliar accounts, or mistaken late payments, contact the credit reporting agency and ask them to fix the mistakes. If you discover loans or debts that you know nothing about, you may have been a victim of fraud, a data breach or identity theft. 

How to improve your credit score

There are several steps you could take to improve your credit score and credit rating over time. These include:

• Pay your bills on time
  This is an effective way to improve your score. Set up Bills Calendar reminders or automatic payments to ensure you never miss a due date. 
• Limit new credit applications
  Each time you apply for credit, a hard inquiry is recorded on your credit report, which could lower your score. 
• Lower your credit card limits
  Lowering your credit limits and balances could help reduce your credit utilisation ratio. 
• Consider consolidating debts
  If you have multiple debts, consider consolidating them into a single loan with a lower interest rate. 
   

It’s also important to know how long certain details stay on your credit report:

• 5 years – bankruptcy
• 5 years – missed payment of more than 60 days on a credit card or utility bill
• 2 years – delayed payment of 14 days or more on your home or personal loan, or credit card. 

To sum up 

Your credit score is crucial when applying for new credit as it influences the decisions credit providers make on whether to approve your application, and the amount they are willing to lend. 

Your credit report and score are vital to your financial health, so it’s important to understand how your score is calculated and to regularly check it for accuracy.