Banks use it to determine if you are eligible for a credit card or loan as well as what rate they will offer and a landlord may use it to determine if you should be allowed to rent their house. Despite this, a recent survey by Finder.com.au showed almost 10% of Australians don’t even know what a credit score or credit rating is. Your credit score is like a school report card that never disappears. It monitors every good and bad decision you make with money for your entire life. One made-payment on your credit card is a small tick, and one missed one is a big cross.
Your credit rating is comprised of several components:
1) The number of credit facilities you have open and the size of each.
- Banks and bureaus do not care how many cards you have, they care how much debt you have access to. The amount will not impact your score, but it will affect your ability to register for additional credit.
- More cards mean more monthly payments which will increase your number of on-time payments
- The length of your credit history is also essential, the longer you have had a credit facility, the better.
2) The percentage of on-time payments made
- Obviously, the higher your percentage, the better.
3) The number of recent credit enquiries in your name
- There are two forms of credit enquiries, hard and soft. A soft enquiry occurs when you check your credit score. A hard enquiry occurs when a third-party checks your score for the purposes of a credit product. Soft checks will not impact your score, but hard enquiries will result in a minor and temporary loss in score, this amount will usually be added back in 12-24 months.
4) Negative events which could defaulting on a payment or potentially filing for bankruptcy
- These will have a high and negative impact on your score if possible, avoid at all costs.
Each of the above factors has differing levels of importance when calculating your credit score. As an example, each time you enquire about a new credit card, your score will take a minor and temporary hit. I’ve found this number to be around 25 points and it will typically be added back to your credit score in 1-2 years. Missing a payment however, will have a much more severe impact on your score.
Knowing and understanding your credit rating can make a material impact on key moments of your life. Despite this, the previously mentioned survey found that over 70% of Australian’s don’t know what their credit score is. Do you know yours?
What is a good credit score?
Australia has two credit bureaus, Equifax and Experian. Both are more or less the same but your final score will differ slightly, Equifax ratings typically range from 300-850 where anything between 670-739 is considered ‘good’ and Experian scores range between 0-1000 where 625-699 is considered ‘good’.
Now that you know what a good score is you’re probably wondering ‘what is my credit score?’ or ‘where do I get my credit report?’. Not only do we have two credit bureaus, but we currently have two websites which can help us get our credit score.
Get Credit Score is a straightforward and clean website that uses Equifax data to provide you with a credit score each month. If you’re anything like me, it’s important to point out that they will only check your score each month that you log in, if you fail to log in during a month it will provide an estimated score between the last two known scores.
Credit Savvy is my personal favourite and not just because it has my score an excellent 50 points higher. Credit savvy provides a lot more information regarding how your score was calculated so if you are the sort of person who will only check one, let it be this one. Much like Get Credit Score, Credit Savvy provides a clean and simple to use site that offers frequently updated credit scores and your historical data. It also allows you to check your score monthly however they require that you to wait a month between checks whereas you could check Get Credit Score on Jan 30th and Feb 2nd if you were in the mood to waste your own time (credit scores don’t change very often). That being said, the key difference between the two providers is that Credit Savvy offers a complete credit report which highlights how you faired in each of the 4 categories discussed above. It notifies you of how many credit facilities you have open as well as their size, it shows your percentage of on time payments, the number of recent credit enquiries in your name as well as any negative events that are considered in your score.
How to improve your credit score
Unfortunately, there are no quick fixes for credit scores. There are easy ways to improve your rating, but they all take time, the most basic of which is to pay your bills on time.
If you have missed a credit payment, the best way to minimise its impact on your credit score is to increase your percentage of made payments. If you have multiple cards place a small recurring amount on each every month, I use Netflix and Spotify. Once a payment has been missed you can never get your percentage of on-time payments back to 100%, but you can get it very close by making a large number of payments. Using multiple cards is also a great way to increase the size of your credit history.
Making repayments in full is another excellent way to boost your credit rating. This not only helps you avoid paying interest, but it also keeps your ratio of available debt to used debt low.
Don’t close existing accounts. Your credit score looks at the length of your accounts and cancellation of a long term account can result in a sizeable hit to both your credit history and score. Where possible look to open new accounts without closing existing ones.
Finally, make sure that to monitor your credit score regularly. This will enable you to spot any errors and raise them with a credit bureau.