What is a credit score and does everyone have one

If you're looking to borrow or get on top of your finances, it's helpful to know what your credit score is and what it means for your borrowing power.

What is a credit score?

You may have heard of a credit score, but what is it exactly, and who does it apply to? Most people will generally have a credit score (or rating) which is based on your loans and debts – how much you borrow and, your repayment history.

Things such as personal loans, credit cards, mortgage repayments and buy-now-pay-later financing all contribute towards your credit score.

Even your household bills can have an impact on your score. If you consistently fail to pay certain utility bills, some companies may report these defaults to credit bureaus who collect your credit score data.

Essentially, your credit score determines your 'creditworthiness' and tells lenders how much of a risk you are when you're looking to borrow money.

How is your credit score calculated?

In order to get a better overview of your history and 'creditworthiness', providers will send your credit information to credit bureaus who compile your data from all providers into one credit report. Essentially if you've ever applied for credit or a loan, there will be a credit report about you.

There are three credit bureaus in Australia who all collect data, and each of them have their own methods for calculating credit ratings. Generally speaking though, the higher your score, the better your creditworthiness.

Everyone is entitled to receive a free copy of their credit report every three months. While it's unlikely you will need the information this often, it can be worth keeping an eye on each year, particularly if you're considering buying a house or taking out a substantial loan.

When calculating your score, credit bureaus will take the following into account:

• your debt history (current and past)
• your repayment history including if any missed payments were paid.
• loans such a personal, renovation, refinancing, or as guarantor for someone else.
• the number of loan enquiries you've made (too many of these may suggest financial instability)
• credit cards and your credit limit
• the number of accounts you've opened and closed
• details about any court hearings
• bankruptcy or personal insolvency

Check your score online through Australia's credit reporting bodies:

• Illion
• Equifax
• Experian

What does it all mean and why is it important?

Lenders will use your credit score rating collected from the credit bureaus, alongside their own risk criteria, to determine whether to lend to you, how much and, at some lenders, the rate of interest.

If you have a high credit score (a good thing!) you have more bargaining power when shopping around for an interest rate. If your credit score is low, your interest rate may be higher not to mentioned you may be restricted on how much you can borrow or you may need to provide a larger deposit amount to reduce the risk.

The good news is, if you do have a low credit score, it doesn't have to stay that way. Here are a few simple actions to help fix and maintain your credit score:

• Update your contact details. Wrong details can easily lead to overdue bills. 
• Pay your bills on time, including 'buy now, pay later' financing.
• Avoid applying for multiple loans and credit cards, this is all recorded against your credit score.
• Pay down your debt and manage your money to what you can comfortably afford.
• Check your credit score for any mistakes including misreported or duplicated debts.

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Published: Wednesday, 09 Mar 2022