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How Can You Improve Your Credit Score with These Tips?

If you have a credit card or have ever taken out any loans, chances are that you’ve got a credit score. Many of us hear about the importance of having a high credit score, or maybe we’ve had problems applying for loans with bad credit. But what exactly does that number mean, and how does a credit score in Australia work? Our goal is to help you learn more about this important number that can determine your financial future.

Contents

    What is a credit score?

    Your credit score is a bottom-line summary of the state of your personal finances. It is meant as an index of how trustworthy you are from the perspective of a bank or a lender. A higher number on the scale means that you have stronger credit and are considered a safer loan prospect.

    Credit scores are generated by different reporting agencies, such as Equifax, Experian, and Illion. Each of these gather data from banks, utilities, telecommunications providers, and other sources to get a picture of your financial history. Every reporting agency has a slightly different scale and assesses your finances differently.

    How do I see my credit score?

    Many banks provide monthly updates on customer credit scores as a courtesy service. You can do a simple credit score check on your banking app at any time. You are entitled to one free annual copy of your credit report in Australia, and you can get one from each credit agency. There are also online services like My Credit File and Check Your Credit that can provide free reports. “In addition, many personal finance apps will update you on your credit score and provide tips for how to raise it.

    How is my credit score calculated?

    There are several factors that go into your credit score, covering various aspects of your financial history. The main factors include:

    • Current and prior debts: Carrying excess debt will hurt your credit score.
    • Repayment history for loans and credit cards: Lenders want to see that you have paid off past loans.
    • Timeliness of past payments: Falling behind on your rent or mortgage, utilities, and other bills can hurt your credit score.
    • Current credit limits and utilisation: Higher credit limits reflect trustworthiness from your bank, but maxing out your cards each month can be alarming.
    • Quantity and frequency of past credit applications: If you have been repeatedly trying to borrow money, that can be seen as an indicator of financial instability.

    Your overall credit score will range from 0 to 1000 or 0 to 1200 depending on the reporting agency. A higher score means that lenders see your financial history as consistent, reliable, and stable, and are thus more willing to give you new loans. A lower score will make it harder to get new credit.

    Note that your credit score is not the only factor that lenders consider. They understand that the score is dynamic and can sometimes jump up or down sharply due to various financial circumstances. However, having a strong credit score in Australia is still very important.

    How do I know what my credit score means?

    Each company has different breakdowns across their score range for how the number is interpreted. Scores are grouped into bands that are known as credit ratings. Here, we have summarised the three biggest reporting agencies’ scoring systems.

    Credit RatingIllionEquifaxExperian
    Excellent800 – 1000853 – 1200800 – 1000
    Very Good700 – 799735 – 852700 – 799
    Average500 – 699661 – 734625 – 699
    Fair300 – 499460 – 660550 – 624
    Low1 – 2990 – 4590 – 549

    What is a good credit score?

    A good credit score is on the higher end of the spectrum—usually at least 700. It is high enough that the applicant can confidently apply for new loans and expect approval.

    What is a bad credit score?

    A bad credit score is on the lower end of the spectrum—usually below 550. Poor credit makes it more challenging to get approved for loans and credit cards, and lenders will usually charge higher interest rates to mitigate risk.

    How can I improve my credit score?

    Raising your credit score can take a lot of work, but as any finance advisor will tell you, it is one of the best things that you can do to help strengthen your financial future. These are the best ways to reach a solid credit score:

    • Build a savings record with your bank: A continuous history of having a healthy savings account demonstrates financial stability.

    • Make payments on time: Avoid late payments on utilities, credit cards, or existing loans, since this will drag down credit.

    • Pay down existing debts: Reducing your current outstanding debt can show progress towards a stronger financial position.

    • Limit credit applications: Be strategic with new loan applications when possible, since too many applications will ding your credit.

    • Be mindful of credit utilisation: Avoid maxing out your credit cards so that you are not repeatedly running into your credit limit.

    Be sure to review your credit report and look for any mistakes or wrongful omissions. You can always contact the credit provider for verification or correction.

    Also be vigilant of any identity theft, since this might result in someone taking out loans in your name and not paying them back. If this happens, notify the police and the fraud department of your credit provider as soon as possible.

    Credit score FAQ

    How do I fix an error in my credit report?
    The only way to change or remove information from your credit report if it’s either incorrect or out of date. To fix the error, you should contact the entity that provided the faulty information to the credit report agency.
    What’s the difference between a credit report and a credit score?
    A credit report is an extensive record with many details on your borrowing history and other financial background information. Meanwhile, a credit score is a single number that distils your whole credit report into one data point.
    How come I don’t have a credit score?
    If you have never taken out any loans or credit cards, and if you do not have bills in your own name, it is possible that you might not have a credit score at all. However, if you’re certain that you’ve taken out some form of credit and you are still not seeing a credit score, you should check with your credit provider.
    Will checking my score hurt my credit score?
    Not at all! This is a big myth about credit scores that is fortunately untrue. Credit agencies distinguish between a “soft inquiry” (you simply asking for the number for the sake of knowing it) versus a “hard inquiry” (a lender formally checking the number for the sake of a loan application). A soft inquiry has no impact on your credit score.

    Key takeaways for credit scores in Australia

    Credit scores can be a source of stress for many Australians, but they don’t have to be. Now that you’ve learned more about how credit scores work and how they’re calculated, you’ll know the best ways to raise your credit score and become eligible for better loan offers. A strong credit score is a great asset that can help you build a financially secure future.