Guide: How to Improve Your Credit Score

If you’re looking for finance, a healthy credit score is vital. People in Australia who are 18 and over and have applied for credit have a credit file. This could be a phone plan, credit card application or loan. Your credit file contains your credit score.

The Basics:

Credit File: Also known as a credit report, these are used by lenders to determine the ‘risk’ of giving you credit. They contain personal information and credit history. They are commonly in PDF format.

Credit Score: Located on your credit file, these are usually based on a scale from 0 to 1,200, depending on the reporting agency. Score numbers can be thought of as a car’s speedometer: a passenger car shows speeds up to 240kph but they can’t actually reach that speed. It is next to impossible to reach a credit score of zero or 1,200 as they are ‘scaled’.

*Equifax is Australia’s largest credit reporting agency. Their scores are based between 0 and 1,200.

How are credit scores calculated?

Scores in Australia are based on:

• The amount of money you’ve borrowed or tried to borrow
• The number of credit applications you’ve made
• Your repayment history: whether you pay on time

How do I get my credit file?

Agencies like Equifax can provide you with a copy of your credit file. Fees only occur when you want your copy in a short amount of time or multiple copies.

*Viewing your credit file DOES NOT affect the score.

Credit Scores Explained:

Excellent Score: 822 - 1,200
These files have been built up over many years of perfect repayment history. Holders of these scores haven’t applied for too many or too large amounts of credit and haven’t been knocked back. Adverse financial events are highly unlikely to occur. They represent the top 20% of credit file holders.

Very Good Score: 726 - 832
These credit files have a strong and lengthy repayment history with no late or missed payments. Adverse financial events are unlikely to occur in the future. These are the top 61 - 80% of credit file holders.

Good Score: 622 - 725
These credit files are generally ‘safe’ for lenders and contain minimal adverse repayment history. This is the mid-range (41 - 60%) of credit file holders.

Average Score: 510 - 621
These credit files are considered likely to have future adverse financial events in the next 12 months. This range consists of the bottom 21 - 40% of credit file holders.

Below Average / Poor Score: 0 - 509
It means the credit file contains recent adverse repayment history and / or multiple credit applications, often being declined. This range consists of the bottom 20% of credit file holders.

Why Scores Matter:

Almost all Australians need or at least want credit at some stage in their lives whether it’s for a car, home, a credit card on even a phone plan. Why Scores Matter:

With a lower credit score, you’ll have far less chance of approval and borrowing power. This means you won’t be able to borrow large amounts and lenders who do approve you for small amounts will charge high-interest rates as they consider you more ‘risky’.

Higher scores open many doors. Buying that nicer house or car - or both or having more options in the business. Additionally, as more lenders will approve your applications, you’ll have far more bargaining power when negotiating interest rates and loan amounts.

How to Get a Better Score:

1: Pay Your Debts

Lenders and financial institutions want to see repayment history. This shows whether you’re likely to make repayments in the future. If you’ve never had credit before, you’ll appear ‘neutral’ in the eyes of lenders and they’ll pay more attention to your income and expenses.

Solution:

Make sure all your current loans are up to date. If you’ve recently missed a payment or paid late, consider delaying your credit application for several months to show lenders it was a one-off.

Note: Utility bills, rental agreements and other bills like phones and gym memberships show up on credit files too. Make sure you don’t have any outstanding bills.

2: Avoid Enquiries

Shopping around is a great idea in most cases, but not credit applications. Each time you make a formal credit enquiry, it’ll cost your score. Multiple enquiries in a short period of time can lower the score even more.

An enquiry is when you formally ‘ask’ for credit. Usually, this involves providing personal and financial details to a lender with the intent of getting a loan.

Solution:

Talk to a broker. Brokers are financial experts who deal with lenders and borrowers every day. They can give you a clear idea of whether you’ll be approved along with the amount and interest rates, all without making a formal enquiry.

Note: Checking online to see how much different banks will lend you just out of curiosity can result in formal enquiries harming your credit score and taking years to recuperate.

3: Age of File

The age of your credit file adds to its strength. Remember, the earliest you can get a credit file is age 18. People often start small and ‘build’ their credit history. Younger or ‘newer’ credit files are more susceptible to heavy score hits.

For example:

Person A:

At 18 years old, they buy a phone on a plan which creates a credit file. At age 19, when their credit file is only one year old, they apply for a car loan. This costs a large amount of their credit score as their file has a minimal history.

Person B:

At age 18, they rent an apartment and receive power bills, creating a credit file. At age 23, when their credit file is 5 years old, they apply for a car loan. Assuming they haven’t missed any payments or bills, the hit on their credit score will be less than Person A.

Solution:

Avoid applying for large loans when your credit file is young. Consider ‘building’ your credit history by completing a small loan, like a phone plan first.

4: Size & Type

Requesting to borrow large amounts of money can result in larger hits to your credit score. A common occurrence is when a young person with a relatively new credit file applies to buy an expensive car. Whether approved or not, the enquiry still reduces the credit score.

Different types of lenders have different risk calculations and deal with credit scores differently. For example, a traditional bank and a non-traditional, niche lender. Similar credit applications may result in different hits to your credit score from each type of lender.

Solution:

Think about how much you need and where you’re applying. Don’t try to borrow beyond your means. If in doubt, talk to a broker before applying.

5: Loan Reason

The type of loan and reason for credit can also make an impact on your credit score. Mortgages, car loans, credit cards, home renovations and personal loans for things like holidays, weddings and debt consolidation all have different impacts on a credit score.

Solution:

Do some research before applying and find out what kind of loans different lenders specialise in. Matching your circumstances and loan purpose to a specific lender and product can reduce hits to credit scores.

Calculating Score Hits:

As we can see above, there is a real ‘science’ in calculating credit scores and deductions for different events. From types of loans and lenders to the age of the file and number of enquiries, a lot is taken into account.

FAQS

1: Does declaring bankruptcy affect my credit score?

Yes. This typically lowers a credit score and can exclude you from credit.

2: What happens if my score is really low?

Lenders look at low scores unfavourably and you may have to consider different options from traditional lenders. Interest rates can typically be higher.

3: If I change address, how does my credit file know?

It won’t know until you apply for finance again. You can also update your personal information through reporting agencies like Equifax.

4: Do criminal charges/convictions affect credit score?

No, generally this doesn’t affect credit score depending on the conviction. However, they can be visible on credit files.

5: Do rich people have higher scores?

Not necessarily. Credit scores are based on repayments, not income.