Your credit score explained

Most of us know we have a credit score – even if we don’t know what it is. And if you did know your magic number, would you know what it means?

Your credit score is what lenders use to assess your risk rating, or the likelihood of you defaulting on a credit agreement. Several factors are used to determine your credit score, which include:

1. the number of times you have applied for credit – made by lenders/credit providers
2. the number of credit enquiries you have made in the last 12 months
3. your credit pattern – how many lenders from which you have applied for credit
4. your default history – e.g. late payments, missed payments, outstanding payments (this can include utility companies, not just banks and credit card providers)
5. payment history – do you pay on time, only pay the minimum balance, etc.

Each category is given a different weighting, or points, and the total is your credit score. This is then used by potential lenders to assess your risk of defaulting. It’s worth noting that this is only one such tool that lenders use; your details will also be assessed against their own internal criteria, which explains why one lender may say no but another approves your application.

While different agencies use differing criteria to rank your score, having even a basic understanding will help you manage your credit profile.

Your credit score is expressed as a number between 0 and 1200 – the higher the score, the more credit-worthy you’re considered. If you have a score of around 200, you are determined to be a high risk, with a strong possibility of defaulting on an agreement within 12 months. The national average score, determined by credit reporting agency Veda, is 749. This is quite good, so achieving any higher than that makes the world of credit your oyster, with access to better borrowing interest rates.

So what can you do to keep you credit score above the nation’s average? These few simple steps may help:

1. Pay your bills on time, and as soon as you experience any difficulties, contact your credit provider. It’s easier to deal with the issue then and there rather than trying to clear a bad debt years down the track.
2. Make sure all bills are being received. Get them sent to a fully operational email address, and if you move, make sure you advise your provider of your new address.
3. Don’t apply for credit on a whim. While this may seem obviously foolish, it can be tempting to consider an interest-free payment plan, or a better interest rate to transfer the balance of credit cards. Too many applications will be detrimental to your credit rating.

Ensure your file is correct and up to date. If a mistake has been made, follow it up immediately and don’t assume it will just disappear.

If you do find that your credit record has a default recorded, whether wrongly or the debt has since been paid, remember you can ‘fix’ this yourself by contacting the credit provider directly. DO NOT go to one of the growing number of ‘debt repair’ agencies that will only charge you for doing something you can do yourself. Or they may even use questionable or illegal means to ‘help’ you out of your predicament.

Find out how you can get a copy of your credit file at OAIC.gov.au

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