The Ultimate Guide To Credit Ratings & Score

Have you been scrambling around the Internet in search of an evaluation of your credit score or answers to how it can be improved? What about how loans affect your credit score – or if you'll be able to get a loan to begin with?

Well, the search ends here! We've put together the ultimate guide to credit ratings and your credit score, covering everything from what is a good credit score in Australia to how applying for certain loans can affect your credit rating.

What is a credit score?

Your credit report is a reflection of your financial history, while your credit score shows how reliable that history is – in other words, it shows lenders and other financial institutions whether you have a positive or negative outlook as a borrower.

In Australia, you'll find Equifax to be the largest credit reporting bureau. They use their proprietary Equifax score to determine your credit rating, with 0 being the lowest score and 1200 being the highest, but please keep in mind that different credit reporting bureaus may use a different score to Equifax. Experian is another body that produces credit reports and will give you a score between 0 and 1000.

Your credit score will fall somewhere within these two numbers and helps lenders assess applications for loans and credit cards. Your score is used to predict the outcome of your loan within the next 12 months – if your score indicates you may default on the loan or fail to make repayments, your application will likely be denied.

How does a cash advance work?

A cash advance works just like any other advance loan, although some cash advances can be used to purchase a cash equivalent, such as gambling chips and lotto tickets. When applying for a cash advance loan, the application process is quick, though your lender may require you to undergo a credit check.

A cash advance loan will usually come with interest, an establishment fee and monthly fees, or a combination of these.

What is a good credit score?

Using the Equifax score as our guideline, we can break down the numerical differences between a good credit score and a bad credit score. Below are the numbers you'll need to score in order to fall into certain credit bands:

  • Excellent: 833 – 1200. This means you are in the top percentile (81% – 100%) of Australians with active credit, and adverse events are highly unlikely to affect you within the next 12 months.
  • Very Good: 726 – 832. This means that within the next 12 months, unfortunate events are unlikely to be recorded in your credit history.
  • Good: 622 – 725. If something negative happens in the next 12 months, it's less likely to be recorded in your credit history.
  • Average: 510 – 621. This score indicates that you're more likely to suffer from an adverse event.

Having a good credit score is advantageous in almost every way – in some cases, it's better than having no credit history at all.

What is a bad credit score?

Any score below 624 is considered a bad credit score. This is when you will start running into troubles if applying for a credit card or personal loan. But not all is lost – thankfully, there are things you can do to improve your credit score, as well as things to avoid if you don't want it to drop any lower.

What factors affect your credit score?

You might be surprised at just how many things can affect your credit score. In some cases, small decisions can have lasting impacts. So, if you've ever wondered "does applying for a loan affect your credit rating?", the answer is unfortunately yes – even if you are pushed back.

Your credit score is affected by many things, including:

  • Missing a repayment
  • Maxing out your credit limit
  • Applying for loans from untrusted lenders
  • Applying for several credit or loan products at once
  • Applying for too large a loan
  • Being sentenced at a court level to repay debts, also known as a judgement
  • Not checking your credit report often enough
  • Ignoring errors on your report
  • Not alerting creditors to a change of name
  • Borrowing money in order to raise your credit score
  • Closing credit cards with a good history.

But does applying for financial hardship affect your credit rating? In general, no. If you cannot afford to pay back a loan due to changes in your financial circumstances, you may be protected under credit law. However, even if the loan isn't covered, you can still negotiate new terms to repaying your loan. Partial payments will still be recorded as being late on your credit report, but if you are able to demonstrate that you are genuinely trying to get back on track (as will be recorded in your report), your lender may look favourably upon you.

How do I improve my credit score?

Just as there is a long list to what affects your credit score, there is a long list of things that can be done to improve your credit score.

  • Pay your loans and bills on time. Consider setting up direct debits to help with this.
  • Keep track of what credit commitments you make. This means you should do your research and only apply for loans you're sure you'll be accepted for. Don't apply for too many loans at once.
  • If you have a change in address, let your lenders know.
  • Talk to your lender if you're having problems repaying your loan, and see if you can organise a new repayment plan.
  • Track your credit record. You can obtain a check on your credit record once a year for free – this is recommended to ensure your score is trending up, and it helps you avoid penalties for not checking your score often enough.

How often does my credit score change?

The answer to this question varies. In general, there is no set time at which your credit score will change. Your credit report may be updated monthly, when you apply for credit, when you close an account, when you make a repayment, and more.

It is possible to raise your credit score in as little as 30 days, but you will need to be committed to removing debts.

How To Check Your Credit Score

You can access your credit score once a year for free in Australia. It can be done online, and you usually get your results within minutes. There are several institutions that will calculate your score for you, including:

There are also subscription services you can sign up to that will give you recurring reports over 12 months if you're serious about keeping your credit in check and improving your score.

How is your credit score calculated?

A lot of numbers fly about the place when your credit score is calculated. This is because your score is based on an algorithm that looks at patterns in your financial history, characteristics of your credit profile, and your credit applications.

When it comes to patterns in your financial history, these can include shopping around and applying for too many loans in a specific period of time. Defaults, credit infringements, court judgements and bankruptcies are also a part of this calculation. Your credit score is also calculated by your credit profile, which involves your age, length of employment and the length of your credit history. Lastly, your score will also take into account credit applications, such as a payday loan versus a loan from a bank or credit union.

As you can see, there's a lot that goes into determining your credit score, and there's a lot you can do to improve it. If you'd like more information on personal loans, budgeting and money management, check out our blog for more hints and handy tips!