Introduction

If you’ve made it this far, congratulations! You are now armed with the information you need to understand and utilise your credit score. But as the age-old saying goes, practice makes perfect! In this lesson, we’re going to go over some of the most important information you’ve covered so far.

Here’s what we’re going to cover now:

• What is a credit score and credit report?
• Why do your credit reports and scores matter?
• What goes onto your credit report and for how long?
• What affects your credit score?
• How to improve your credit score.

Let’s begin!

What is a credit score and credit report?

A credit score is a number ranging from 0 – 1,200 which provides an overview of your creditworthiness (how reliable of a borrower you are). The higher your credit score, the more reliable you are perceived to be by lenders. In this context, reliable means that you’re likely to make the repayments if the lender offers you credit.

Your credit score is calculated from the information on your credit report. Your credit report holds your recent credit history including your current accounts and recently closed accounts, repayment history, defaults and more.

Why do your credit reports and scores matter?

In Australia, you have three credit scores and reports, one each from Equifax, Experian and illion – the three credit bureaus in Australia (also referred to as Credit Reporting Agencies). Every time you apply for credit, such as a loan, phone plan or credit card, the company you have applied to will check your credit reports to see how reliable of a borrower you are. 

Some credit providers will check just one of your credit reports, some will check two, and some might even check all three.  Your credit reports and scores are some of the factors used by lenders to determine whether they will extend you credit.

Whilst your credit score and credit report aren’t the only factors used to determine your creditworthiness, it is a significant piece of the puzzle. Therefore, your credit score and the information on your credit report could be the difference between you being accepted or rejected for credit.

What goes onto your credit report and for how long?

Your credit report is an overview of your recent credit history. Therefore, it won’t showcase your entire credit history, but only more recent information. This is particularly beneficial if you have a poor credit history – you can work to improve it, and it won’t always be a black mark on your credit report.

Here’s what goes onto your credit report and how long items typically remain on your credit report:

• Credit accounts – your credit report will outline all of your current credit accounts, as well as any that you have closed in the past 2 years;
• Credit applications – any application you have made for some type of credit will remain on your report for 5 years regardless of whether you were approved or rejected;
• Repayment history – your repayment history over the past 2 years;
• Defaults – if you default on a repayment then it will appear on your report for up to 5 years;
• Court judgements and bankruptcies – 5 years;
• Serious credit infringements – these can stay on your credit report for up to 7 years.

What affects your credit score?

Your credit score is calculated from the information contained in your credit report. Therefore, what affects your credit score is the information on your credit report. Positive information, such as consistently meeting your credit repayments, and not too many active credit accounts, can contribute positively to your credit score.

Negative entries, such as defaults, bankruptcies, too many credit enquiries and active credit accounts, on the other hand, can harm your credit report. Below we’ve provided a breakdown on what can harm your credit score.

What harms your Equifax credit score: 

• Late repayments;
• Applying for a large amount of credit in a short period of time;
• Closing a credit account*;
• Stopping credit-related activities for an extended period;
• Negative public records, such as bankruptcy.

*According to Equifax, the age of your credit accounts matters. The older your credit account is, the more weight it has towards your credit score. This is because it demonstrates that you can manage your credit effectively for a sustained period of time.

What harms your Experian credit score:

• A large number of credit applications in a short period of time;
• Open accounts with debt collection agencies;
• Short term credit;
• Missed payments;
• Bankruptcy actions;
• Defaults;
• Court judgements.

How to improve your credit score

With all of this information in mind, how can you improve your credit score? Equifax recommends the following four healthy habits to get into in order to improve your credit report.

1. Pay your bills on time

Your repayment history makes up a decent portion of your credit score. Therefore, ensuring that you meet your repayments each month can go a long way for your credit score. If you’re struggling to pay your bills, then keep on reading, as we’ll give you a refresh on budgeting techniques in the next module.

2. Only apply for credit when you need it

Each time you apply for credit, the company you’re applying with will check your credit report. This is referred to as a hard enquiry, and it will appear on your credit report for the next 5 years.

Hard enquiries initially harm your credit score, until enough time passes for you to demonstrate that you can effectively handle the credit. Therefore, the more credit you apply for, the more damage it will do to your credit score.

Hard enquiries will harm your credit score regardless of whether you were approved or rejected for credit. The credit enquiry will also remain on your credit report for 5 years regardless of whether you decide to proceed with the credit application.

3. Let your credit accounts mature

According to Equifax, the longer your credit accounts age, the better it is for your credit score. This is because you are demonstrating that you can effectively manage your debt for a sustained period of time. 

However, having open credit accounts just for the sake of it isn’t necessarily the best strategy. You should only keep a credit account open if it is beneficial for your individual circumstances.

4. Avoid public records, such as bankruptcies

Serious credit infringements and public records can seriously damage your credit score and will create a black mark on your credit report until the information eventually expires. This can take up to 7 years and will likely affect any credit application you make during this time.