First, let’s set the scene. Change is well underway to Australia’s credit reporting system, with our data showing more than 80% of home loans and 60% of credit card accounts now having account payment information shared as part of the new Comprehensive Credit Reporting regime. So whether or not you pay your loans and credit cards on time every month may now show on your credit report.
All the data on your credit report is then used to calculate your credit score, which is essentially a snapshot of the information in the report, summarised as one number.
It can be important to be aware of the changes to credit report data in Australia, as they could affect your credit health and, as a result, any future credit or loan applications you make.
To help you better understand credit scores and the types of behaviour that can affect your score, here are some answers to a few common questions.
How many credit scores do I have and why are they different?
There are a number of credit scores that lenders can choose to use. The three main credit reporting bodies in Australia – Equifax, Experian and Illion (formerly known as Dun and Bradstreet) – all create their own credit scores calculated from the data in your credit report. A lender can use one or all of the credit reporting bodies’ scores, including their own internal scores that include more than just the credit reporting information.
All three credit reporting agencies are affiliated with different individual online credit score businesses (GetCreditScore, Credit Savvy and Credit Simple, respectively), which all let you request a free credit score. The scores available from these businesses are useful to give you an indication of your credit health but don’t forget that lenders consider other factors besides your credit report and some lenders even calculate their own credit score.
Your credit score can change over time as your own credit behaviour changes, such as if you apply for or take on more debt, or if your repayment behaviour changes (24 months of repayment history is kept on your credit report).
Lenders report to one or more of the credit reporting bodies, sharing their customers’ comprehensive credit reporting information for inclusion in their credit report. They can also access data other lenders have provided to the credit reporting bodies they work with.
Not all credit reporting bodies will necessarily have the exact same information about you – it all depends on which credit reporting body your lender shares your credit reporting information with.
What is considered a good credit score?
There is not a single standardised credit score range in Australia – Equifax creates scores on a scale from 0-1,200, whereas the other two agencies use ranges of 0-1,000. Generally the higher the number, the better your credit rating. As a rule of thumb, a score above 650 is typically considered “good”, while anything above 800 is “excellent”, although the exact cut-offs will depend on the credit agency calculating your score.
How often does my credit score change?
Changes to your credit score depend entirely on how often your credit report is updated. There is sometimes a lag between when you perform an action, such as making a repayment on a loan, and when your lender reports it to the credit reporting body they subscribe to. It’s only when the credit reporting body has the updated information that your credit score may change.
Information that’s added (for example, new payment information showing you’ve paid off an existing default, or updates to your repayment history) or removed (for example, repayment history that is more than 24 months old, or information about a default that was reported more than five years ago) can affect your credit score.
And newer information tends to have more of an impact than much older information. In general, your credit score probably won’t change all that much over time if your use of credit doesn’t change. But it’s important to note that each time your score is calculated, it’s taking into consideration the information that is on your credit report at that time. So as the information on your credit report changes, your credit score can also change.
Does applying for a credit card hurt my credit score?
One application for a credit card is not likely to hurt your score, but making multiple applications in a short period of time could. That’s because numerous applications can be perceived as desperation for credit, or lenders could feel that you’re taking on too many accounts, potentially making it difficult for you to afford monthly payments.
When you apply for a credit card or loan, an enquiry is recorded on your credit report. Your credit report shows a five-year enquiry history, which is factored into your credit score.
Will closing a credit card or paying off a personal loan automatically improve my score?
The total amount of credit you have is one factor affecting your credit score. The more credit you have, the more it will affect (and potentially reduce) your credit score – but this can be offset by good repayment behaviour. Reducing the amount of credit you have may be a way to improve your credit score, but again this is only one factor taken into consideration.
I always pay my bills on time – will that help my credit score?
Yes, the way in which you manage your repayments on your credit and loan accounts is one of the top factors in most credit scoring models. If you have been making repayments on your existing debt on time, and your lender shares this information with the credit bureau, this information will be factored into your score over a 24-month period and it will impact your credit score positively.
Can credit repair companies really help me improve my credit score?
Beware of credit repair companies offering you services to fix your credit score. Nobody can remove information that is correct from a credit report. Negative information, such as a default information, generally stays on your credit report for a five-year period, and there is nothing a credit repair company can do about that.
Credit repair companies will often overstate their ability to improve a credit report, and charge customers for a promise that they can’t deliver on. Plenty of customers end up thousands of dollars out of pocket without any real improvement in their credit report.
If there is a mistake on your credit report – you can take steps to correct that information yourself, for free.
About Geri Cremin
Geri Cremin is a Credit Reporting Expert at Creditsmart.org.au, an information website developed to help consumers understand how credit reporting operates in Australia.
Main image source: Roman Samborskyi (Shutterstock)