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Module 3: What affects my credit?

Introduction

Your credit score can fluctuate a lot, especially when you are applying for credit. Every enquiry a company pulls will affect your credit score. How good would it be, if you could predict how your score will change to choose the best time to apply for credit?! Well… whilst no one knows exactly how credit scores are calculated, there are multiple things you can do. Observing your scores over time will help you get a better understanding of what affects them and what doesn’t. 

Why does my credit score change?

Your credit score is constantly changing, but why is this? Your rating is calculated based on the information in your respective credit reports. This information is updated on a monthly basis, with your repayment history and all other necessary information being added or removed from your reports each month. Each time your report is updated, your credit score might fluctuate depending on whether there have been any changes.

What goes into my credit report: a deep dive

Each credit bureau has its own secret formula they build your credit report upon. No one knows exactly what credit scores are made of but we’ve got a good idea. If you mix the following ingredients and shake them well, you will get a credit score: 

  • Credit Accounts 
  • Repayment History 
  • Defaults 
  • Credit Applications 
  • Bankruptcies and Debt Agreements 
  • Credit Report Requests

However, not all of them are equally important. The number of credit applications made and your repayment history make up a significant chunk of your credit score. While any so-called adverse events (defaults or bankruptcies) can have a large negative impact, their significance decreases over time. Let’s have a more thorough look at each category and what you can do to keep it safe. 

Credit Accounts 

Any credit accounts that you currently have, or accounts which have been closed within the past 2 years will be displayed here.

Whilst credit accounts only last for 2 years after being closed, any credit applications that you have made in the last 5 years will be listed here, regardless of whether you were approved for the credit, or decided to proceed with the credit.

It includes details like: 

  • What type of credit did you have?
  • Which credit provider did you go with?
  • What is or was your credit limit?
  • When did you open the account, when did you close it? 
  • Were co-signers listed on your credit account?

When managing your finances, it may be good to think about different types of credit. While continuous repayments are the most important measurement of your credit success, you may want to mix and match types of credit. A healthy credit mix proves that you can manage different types of credit at the same time and may give you a better credit score. Simply having multiple credit cards won’t do the trick! 

Tippla hint: Each application will pull a hard enquiry and may affect your credit score – and the likelihood to get approved for your application. It could work out better to space out your credit applications over a few months and let your score recover in between. 

Repayment history 

Your repayment history states if you historically have made your repayments on time (Captain Obvious off…). If you have missed a payment in the past 5 years, it is most likely listed. Note that only payments that have been late for 60 days or longer are listed, therefore, you may have been lucky if you got things straight with your credit provider.  

Your credit report will include:

  • Repayment amount 
  • Due date for payment 
  • How often you have paid and if your payment was on time 
  • Missed payments (payments not made within 14 days of due date)
  • Did you make missed payments later?

Comprehensive Credit Reporting (CCR)

Positive or Comprehensive Credit Reporting became mandatory in Australia from 2018. This means the big four banks have to participate fully in credit reporting and provide positive information about customers. Previously, only negative events would have been reported, therefore, you wanted your credit report to be as empty as possible. Today, companies can also report events like regular repayments to give credit bureaus a wider range of data to base their scoring on and give you a better chance to shine. While it is not common practice for most rental agencies yet, they can report positively about you and trends show that this will happen more frequently in the future. 

Defaults 

A default is a non-payment of debt of $150 or more. This includes any phone or utility bills, credit card bills, or loans that you didn’t pay on time or in case of a clear out. (A clear-out = when a credit provider can’t contact you at all). 

A default will be listed if the payment is 60 days or more past its due date or the provider has asked you by phone or in written form to make your payment.

You can avoid defaults generally by paying your bills on time. If you know you won’t be able to make a payment this month, you should contact your provider straight away. They may be able to provide a solution that works for both sides without harming your credit scores. A listed default will be on your report for 5 years and will cause an immediate drop. 

Credit Applications

Captain Obvious speaking again: this category lists all credit applications you have submitted over the last 5 years. When you apply for any form of credit, a hard enquiry is registered. This can cause your score to drop immediately after. Too many hard enquiries at a time will have a negative impact on your credit score. 

It will list:

  • Number of Applications 
  • Total Amount of Credit 
  • Loans  

What other factors impact your credit score?

Your public records list additional events such as infringements, insolvencies, judgements, and directorships. As always, negative events will cause your score to drop. But there is something else you should look out for: cross-referenced files! Remember when we talked about mistakes in your credit report? If one of your addresses is listed incorrectly e.g. and you apply for a loan, the information on both entries doesn’t match and can potentially create an additional file with conflicting information. 

Soft vs hard enquiries 

Whenever you apply for credit, your creditor will assess your application and how big the risk is that you may miss a repayment or won’t be able to pay back your loan at all. Your credit report is one of the elements used to assess if you are a high or low-risk candidate. Financial institutions that provide credit want to see as many details as possible, that’s why a so-called hard request on your credit report is pulled. 

Buy Now Pay Later 

Studies have shown that Millennials prefer Buy Now Pay Later solutions to actual credit cards. In fact, according to consultancy firm AlphaBeta, from 2004 until 2018, the proportion of young people with a credit card fell from 58% down to 41%. Furthermore, nearly 70% of Millennials who use Afterpay were found to use their credit cards less.

Why is this? It’s quick, it’s easy, and it’s convenient: with companies like Zip or Afterpay, you can spread out payments over a specific period of time and keep the money on your own account for longer. BNPL can be used for bigger purchases but also for medical services like dental bills. It’s super convenient – however before you sign up for it, there is one thing you should know: BNPL is like getting a small loan and it can affect your credit score. While Afterpay will only pull a soft enquiry, Zip will send out a hard request. This can cause your credit score to drop. Before signing up for any BNPL services, inform yourself if they will send out a hard or soft request and how this may affect your credit score.

Cancelling your credit card 

You’ve paid off your credit card debt, good job! Now you want to get rid of the temptation and close the account. But wait a minute, this can have a negative effect on your credit score. The age of your credit accounts make a difference for your score, that’s why you should consider leaving accounts open instead.

Unpaid parking tickets 

It’s easy to forget about a parking ticket. However, you should make sure you don’t! Once your council issues a default, the small fee can stain your credit score for up to 5 years. 

Making multiple loan applications 

Too many loan applications in a short period of time will negatively impact your credit score. Space out your applications instead to ensure that you get good interest rates and loan terms offered. 

Maxing out your credit card 

Just because you have credit accessible doesn’t mean you should use it all. Your credit score includes a debt to credit ratio. Using all your credit should cause your score to drop. 

Your phone payment plan 

Paying your phone over time releases financial stress from you. However, you are signing an instalment loan and your credit provider might pull a hard enquiry that will affect your credit score short-term. 

Moving all debt to a single credit card 

While many card providers give high incentives to do so, moving all your debt to a single credit card may not be the best solution. Having a high balance on one of your accounts affects your credit score negatively, while having your debt spread out on multiple accounts may be harder to manage but better for your credit score. 

Getting divorced 

While divorce itself won’t affect your credit score, the mess created while sorting out joint finances might. If you have any joint bank accounts or have co-signed for a loan, you are equally reliable to pay outstanding bills. Make sure that you and your ex-partner sort out who pays for what early in the process and that you both stick to it. Otherwise, it can take years for your credit score to recover!

Tippla is a tool that helps Australians to access and understand their credit scores. We are not financial advisors. We work with a range of industry professionals and compliance check our content to ensure factual accuracy. We do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information in this lesson relates to your unique circumstances.

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