Your credit score gives banks and other lenders a general picture of how reliable you are as a borrower. If you have a good credit score, this signals that lending you money is likely to be less of a risk. But what can you do if your score is currently low and you want to increase it?
What is a credit score?
Your credit score is calculated based on the information in your credit report. This report shows a detailed record of your history as a borrower and includes information such as how much you have borrowed in the past and whether you have paid the money back on time, as well as the details of any credit card or loan applications you’ve made recently.
Your individual credit score will usually sit somewhere on a scale of zero to 1,000 or zero to 1,200, depending on which credit reporting agency you go through. In Australia, there are three main credit reporting agencies: Equifax, Experian and Illion.
Because each agency uses different credit score ranges to categorise consumers’ scores – as well as having different ways of calculating the scores – what constitutes a ‘good’ credit score will really depend on which agency you’re asking. Generally, however, a higher credit score is considered better because it indicates a more reliable borrowing track record, and as a result, a lower credit risk.
What is a good credit score?
A good credit score may mean lenders are more likely to approve your application for credit or a loan compared to if you had an average or below average score. In some cases, it may also have a positive impact on how much they will lend you, the interest rate they charge and other credit or loan terms.
Looking at Equifax credit scores, a score between 666 to 755 is considered ‘good’, a score between 756 to 840 is ‘very good’, and if your score is above 841 it’s viewed as ‘excellent’.
|Below Average||Average||Good||Very Good||Excellent|
|Equifax score range||0-505||506-665||666-755||756-840||841-1,200|
For Experian credit scores, a score between 625 to 699 is considered ‘good’, 700 to 799 is ‘very good’, while scores of 800 and up are deemed ‘excellent’.
|Below Average||Fair||Good||Very Good||Excellent|
|Experian score range||0-549||550-624||625-699||700-799||800-1,000|
Then looking at Illion, it considers a score of 500 to 699 to be ‘good’, 700 to 799 to be ‘great’, and 800 and above to be ‘excellent’.
|Zero score||A low score||Room for improvement||Good||Great||Excellent|
|Illion score range||0||1-299||300-499||500-699||700-799||800-1,000|
What is a bad credit score?
Having a bad credit score may mean some lenders will be reluctant to give you a loan or other credit product, or, depending on the loan type and lender, they may charge you a higher interest rate compared to someone with a good credit score. This is generally because you would be seen as a higher risk and less likely to be able to repay the credit.
So how low does a credit score need to be to be considered ‘bad’? Equifax considers a score below 505 to be ‘below average’, while Experian views a score below 549 as ‘below average’, and Illion considers a score of 299 or under to be a ‘low score’.
What factors affect your credit score?
While every credit reporting agency is different, some of the most common factors that can affect your credit score are:
- Your repayment history (making loan or credit repayments and paying bills)
- The number of credit applications or enquiries you have made
- Negative information such as defaults (where you fail to pay back a debt), bankruptcies and court judgements against you
- Personal details like your age and how long you’ve been at your current job and residential address
- How far back your credit history goes – generally it begins the first time you apply for credit
There can be a fair amount of confusion about what does and what doesn’t affect your credit score. According to Experian’s 2019 Know Your Score survey, 90% of Australians surveyed believed having high-value assets would improve their credit score. This is actually incorrect.
However, if you miss just one credit card repayment, your credit score could drop by a pretty significant 22%, Experian says. This is the case even if you’ve never missed any credit card repayments before. The drop increases to 26% if you miss two repayments and as much as 42% if you miss three or more within three months.
It’s worth noting that since Comprehensive Credit Reporting was introduced in 2018, lenders can now also see some of your positive financial behaviours on your credit report, such as when you make loan repayments on time. This is designed to give lenders a fuller picture of your credit history.
If you are feeling overwhelmed by your financial situation, you are not alone. Many Australians have been financially stressed with the coronavirus pandemic, and our COVID-19 information hub covers latest news and updates. You might also want to ask your lender for financial hardship assistance or contact a financial counsellor for help. You can speak to a financial counsellor for free by calling the National Debt Helpline on 1800 007 007.
How to improve your credit score
Remember, your credit score is not fixed. It is calculated based on what information is available at that point in time, Equifax explains. Therefore, it can fluctuate as new information is added to your file. Negative entries will also drop off your credit file after a certain period of time.
If you’re looking to boost your credit score, here are a few things you could do:
- Make sure you make credit repayments and pay bills on time – steps such as creating a monthly budget to manage money coming in and out, and scheduling automatic payments for bills and other repayments, could help with this.
- Limit new applications for credit or loan products where possible.
- If appropriate, consider lowering the limit on any credit cards you have.
- Regularly check your credit report and make sure the information is correct – if it isn’t, you can ask to have it changed, or for comments to be added to your report. It’s free to update your credit report or remove an incorrect listing.
For more ideas, read our article on seven ways to help improve your credit score. Our Budgeting and Saving section may also be helpful. To find out more about credit scores and check your score for free, visit our credit score information hub.
Main image source: fizkes (Shutterstock).
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