Australians’ credit scores have always been under a microscope, but the pandemic has only added to the scrutiny.
The scores are key to borrowers proving their reliability when applying for loans – and given banks have tightened their lending criteria, having a good credit score can make or break a life-changing deal.
But more often than not, they are misunderstood.
So, what is a credit score? And how can a good one help you buy a forever home, or new car?
What is a credit score – and what is it used for?
A credit score or ‘credit rating’ is a snapshot of financial behaviour that tells lenders whether a borrower can be trusted to service their debts.
Depending on the credit reporting agency, people are given a score between zero and 1000 or zero and 1200.
Essentially, the higher the number, the more trustworthy a customer is considered in the eyes of their bank or credit provider.
Credit scores are calculated from a borrower’s credit history, which is otherwise known as a credit report, and can be influenced either positively or negatively by:
- The punctuality of past credit repayments
- The number of loan applications and repaid loans over the preceding five years (and the frequency of those loans)
- Overdue payments, particularly those more than 60 days in arrears
- The number of ‘hard inquiries’ – times when a lender has pulled up a borrower’s credit information to make an assessment
- Defaults and other kinds of ‘negative’ loan behaviour
- Credit limits, both past and current (including mortgages, credit cards and other types of loans).
Why should I care about a good credit score, and how can I get one?
Crucially, credit scores can dictate how much a lender is willing to offer borrowers for a loan, and can also influence caps on credit limits and interest rates.
A sub-optimal score can prohibit access to some kinds of loan products, or increase interest rates charged, as banks may be less inclined to part with larger sums of money.
Conversely, a decent credit score can increase a borrower’s chances of being accepted for a loan, and can even entitle them to products with lower interest rates.
Depending on the credit bureau, a ‘good’ score is classed around the 550 to 700 mark, with ‘very good’ and ‘excellent’ scores ranging up to 1200.
How can I improve my credit score?
One of the easiest ways to boost a credit score is mundane but essential: Pay your bills on time.
With the introduction of comprehensive – or ‘positive’ – credit reporting in July 2018, lenders now have a more comprehensive picture of risk with every borrower, meaning meeting repayments (and not defaulting) can bolster credit scores.
Meanwhile, consolidating debt and reducing the amount of unsecured credit hanging over a borrower’s head can not only increase a credit score but also result in lower interest rates and fees on those existing loans.
Can pandemic-related relief affect my credit score?
No, according to the Australian Retail Credit Association (ARCA).
Although credit reports include information about a borrower’s repayment history for the past 24 months, any participation in a bank’s hardship program – including loan deferrals or payment pauses – will not place a warning label against their name.
Instead, details during the deferral period will be reported as “up to date” or blank, depending on whether a borrower was in arrears prior to the arrangement.
“No matter how the assistance is reflected in your credit report, lenders don’t just look at the information in your credit report when they assess loan applications,” ARCA CEO Mike Laing said.
“They consider other factors, such as your income, expenses and employment status … [which] aren’t factored into the credit scores provided on those credit score websites.”
OK, how can I check my score?
The Australian government’s Moneysmart website recommends checking credit scores at least once a year, and before applying for any type of credit card or loan.
Better yet, there’s no credit score penalty for frequent checks.