Getting started: What is a credit score?

Before we dive into the nitty gritty of how to do a credit check, let’s establish first what a credit score is and why it matters. 

Your credit score is a three digit number that essentially represents how ‘credit worthy’ you are. In other words, how risky it is to lend money to you. Here in Australia, your score can be calculated by any of our three credit reporting agencies: Equifax, illion or Experian. Credit reporting agencies keep a record of your repayment history for any loans or credit provided to you. They then use this information to work out your overall credit score. 

This number is a big deal because it’s a massive reference point for lenders when they assess your finance application. Lenders will access your credit report from these agencies when processing any loan or credit applications that you make. They want to be able to see that you are capable of meeting potential loan repayments on time. You credit score will indicate whether you’re likely to do that.

Credit scores typically range from 0 to 1200, depending on the agency and the higher the number, the better. Your credit score will fall somewhere within a five-point scale of excellent to below average. Here’s a breakdown of each credit reporting agency’s ranking:

	Equifax Score	Experian Score	illion Score
Excellent	833 – 1200	800 – 1000	800 – 1000
Very Good	726 – 832	700 – 799	700 – 799
Good	622 – 725	625 – 699	500 – 699
Average	510 – 621	550 – 624	300 – 499
Below Average	0 – 509	0 – 549	0 – 299

Why should I check my credit score?

Information is empowering! The more you know, the better prepared you can be for whatever curveballs might come your way on your personal finance journey. We recommend you check your credit score regularly for these three main reasons especially:

1. A good credit score gives you negotiating power with lenders 

When you apply for any type of credit (e.g. loans, credit cards or even mobile phone/internet payment plans), it’s important that you have an excellent, very good, or good credit score. This increases the likelihood of your credit application being approved on the best possible terms (i.e. with the lowest interest rate).

Lenders will be more likely to reject your application if you have an average or below average credit score. Or if they do approve it, they’ll be likely to charge you a higher interest rate to compensate for the higher risk of lending you money.

2. You can ensure the information in your credit report is accurate

Can you imagine if you got knocked back for a loan because some incorrect information in your credit report painted you in a negative light? It’s almost too ridiculous to consider, but it happens. You have the legal right to access your credit report and to have any inaccurate information changed by the credit reporting agency. So, why waste it?

3. It can help protect you from fraud

We’re living in the digital age and identity theft has never been easier. Criminals can potentially take out credit in your name without you even realising. A quick check of your credit score can keep you up to date with your financial records and alert you to any potential fraud issues.

When should I check my credit score?

There’s no better time like the present! When it comes to credit scores, it’s always best to do a quick check before you apply for finance with a lender. The fact is, credit scores are sensitive – they don’t handle rejection well. Who does? 

If your application with a lender is rejected, it can negatively affect your credit rating. Plus, if you do have bad credit you can then take steps to improve it before you apply for any finance. 

Bear in mind that your credit score is determined by a number of factors, including:

• your credit history (including whether you’ve made your scheduled repayments on time for any previous credit you’ve received). Lenders centrally record this information with the credit reporting agencies, and it stays on your credit file for five years.
• any unpaid or overdue debt repayment obligations you may currently have, including any bankruptcy proceedings or judgements.
• the number of credit applications you’ve made over the past five years. If you’ve had several unsuccessful applications, it means that lenders generally perceive you as too great a credit risk. 
• whether you’re on the electoral roll and how often you change your address. Lenders prefer stability and transparency with your contact details.

Ways to improve your credit score

It’s not as tricky as you may think. Obviously, one of the simplest ways to earn a good credit score is to ensure you make all of your credit repayments on time. If you’ve always done that, then congratulations – you’re already one step ahead!

Really, the two major things you want to avoid are late or missed repayments. Both negatively affect your credit rating in a big way. You can take simple steps to avoid placing yourself in this position by keeping your creditors informed of any changes to your:

• contact details (i.e. your physical or email addresses and phone numbers), so you don’t miss any important ‘payment due’ notices from your credit provider;
• bank account details, so any of your direct debit repayments aren’t missed.

If, by chance, you do find yourself struggling to meet that credit repayment come due day, then don’t hesitate to reach out to your lender. Nine times out of ten they’ll be able to offer you an alternative repayment plan before you start missing any payments. At the end of the day, it’s in their best interest that you make your repayments. So, don’t be afraid to ask. 

If the issue is you have too many debts to keep track of, it might be worth trying to consolidate them into a single credit arrangement. This will enable you to get on top of your repayments and prevent you from falling behind. 

As you can see, you’ve got options! There are many things you can do to develop and maintain a good credit score. So, if you have credit problems (or have had any in the past), don’t stress. There are steps you can take to improve your credit rating and it’s important that you do. 

Things that hurt your credit score

Bad credit has consequences. If you want to avoid getting knocked back for finance when you need it, here are six things you’ll want to be mindful of:

1. Not paying your debts on time

 You’ll develop a good credit score if you pay any money you owe on time. That doesn’t just include loan or credit card repayments. It also includes utility bills like your electricity and phone charges. If you don’t make your credit repayments on time (or at all), your credit score will drop. It’s as simple as that. This one seems pretty obvious, but the mind can be forgetful. So set a reminder if you need to!

It’s important to understand that catching up on any overdue payments doesn’t remove them from your credit report. All it does is show that the overdue debt has been repaid. 

2. Making too many credit applications

Lenders can see any credit application you make because they are all recorded on your credit file, whether you’re successful or not. Making too many applications in a short period can lead them to think that you’re desperate for credit. It’ll also likely drop your score down a few points, leading lenders to think you’re a higher credit risk. 

3. Making payday lender enquiries

Payday loans are short-term arrangements to borrow low amounts at high interest rates. They can help if you’re struggling to make ends meet but it’s important to understand that applying for one goes on your credit file. This may send a signal to lenders that you’re living from pay to pay. The high interest rates on payday loan products can also make it more difficult for you to make your repayments, making it harder for you to improve your credit score.

4. Having no active credit

You can’t develop or improve your credit rating if you have no ‘active credit’. Or if you’re young and you’ve never had any credit at all, you won’t have a credit history. That means you won’t be able to show a track record of making repayments on time. An easy way to get active credit is to put a utility bill in your name and to make sure you pay it on time. Problem solved.

5. Maxing out your credit card

This means that you spend up to your credit limit on your card. It’s a sign that you’re racking up debt, especially if you’re only making your minimum repayment each month. You’ll have no spare credit capacity, which will make lenders wary of giving you more. 

Credit cards also have high interest rates. Many have interest rates that are three, four or five times higher than other types of finance. Maxing out your credit card will make your repayments more expensive because of the higher interest rates. And if you can’t afford to make them, it will hurt your credit rating.

6. Refinancing/balance transfers

Every time you make a credit application, it goes on your credit file. Any credit application can temporarily lower your credit score, including refinancing applications. So, the benefits of refinancing need to outweigh that temporary drop in your credit score.

For example, it can be a good idea to refinance to get a lower interest rate. It can also be a good idea to refinance and combine two or more debts into a single loan. Doing that will make your repayments much easier to manage. So, a temporary drop in your credit score can be worthwhile in either of those situations.

What’s included in my credit report?

The content of credit reports in Australia has changed since 1 July 2018 with the mandatory introduction of the ‘Comprehensive Credit Reporting’ system. This system was introduced in March 2014; yet the take-up rate among credit providers has been slow.

Prior to the introduction of this system, only negative information was included in credit reports, such as missed or late payment information, as well as defaults. The new reporting system is designed to give a much more detailed picture of your credit history, including:

• all your credit repayment history information for the past two years (both positive and negative), and
• your credit liability information (including the type of credit accounts you currently have or have had, when these accounts were opened and/or closed, credit limits, regular repayment amounts, and the name of your credit provider/s).

In other words, comprehensive credit reporting gives lenders a more holistic picture of your credit history. So if you haven’t checked your credit score since the mandatory introduction of the comprehensive credit reporting system, it’s highly likely that your score will have changed.

How much does it cost to check my report?

You’re entitled to access your credit report once a year for free from the three credit reporting agencies. These agencies must give you a copy of your credit report within 10 days of you requesting it. It can be a good idea to check with two or more agencies to ensure that your rating is consistent. 

If you want to check your credit report more regularly than once a year, there may be fees involved. However, you are entitled to an additional credit free credit report within three months of having a credit application rejected, or if you have had an error corrected.  

Knowing where you stand

Awareness is key. Knowing your credit score will give you an idea of what to expect when you apply for credit. Don’t make the mistake of applying to multiple lenders in the belief that it will increase your chances of an approval. You can’t hide from your credit history. All lenders will have access to much of the same information about your credit history. Plus, as we’ve covered, having multiple applications at once hurts your credit rating. So you can dig an even deeper hole for yourself if you try this misguided strategy.

Some lenders will be prepared to offer you credit even if you don’t have a good credit rating, and some won’t. But always remember that the ones that will approve your application in those circumstances will charge you a higher interest rate. Even a small difference in interest rates can make a big difference to the amount you’ll repay over the life of that debt.

If you don’t currently have at least a good credit score, it makes more long-term financial sense to try and improve it before you apply for more credit. Doing things to improve your current credit score (like budgeting to ensure that you make your existing credit repayments on time) will equip you with the skills you need to better manage your additional credit in the future.

Introducing: Tippla

Do you want to check, monitor and improve your credit score? What if we said it didn’t have to cost you anything? That’s what you get when you sign up to Tippla!

For no cost whatsoever, you can get your financial well being on track with Tippla. We compare your score from multiple reporting agencies to give you the best understanding of your credit. Then, through our smart monitoring and insights, we can help you to reach your financial goals in no time. 

Harness this pocket-sized power, sign up today.

 

At Tippla we’ll always do our best to provide you with the information you need to financially thrive, but it’s important to note that we’re not debt counsellors, nor do we provide financial advice. Be sure to speak to your financial services professional before making any final decisions.