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Credit score

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You have lots of numbers in your life. You have a phone number, a street number and a personal identification number (PIN). Another number that you have, but may not be aware of, is your credit score. This number helps a lender decide whether to approve a loan for you.

Your credit score is a numerical rating of your credit worthiness (reputation) as a borrower. It is derived from an analysis of your entire financial history – the good, the bad and the ugly. According to ASIC, that analysis looks at a range of personal and financial information including:

  • Your personal details (such as age and where you live);
  • The type of credit providers you have used (e.g. bank or utility company);
  • The amount of credit you have borrowed;
  • The number of credit applications and enquiries you have made;
  • Any unpaid or overdue loans or credit; and
  • Any debt agreements or personal insolvency agreements relating to bankruptcy.

Your credit score boils down all this information to a number between 0 and 1,200 which indicates how risky you are as a borrower. Put another way, your credit score tells a potential lender how likely it is that you will honour your financial agreements. The higher the score, the better your credit rating is.

Higher scores indicate that you have a history of handling credit well (no defaults) and are likely to pay new credit on time. Lower credit scores reveal that you have a blemished record (court judgment or bankruptcy listing) and that you may not make all your payments if you are given new credit.

Your score may also influence what interest rate you are charged as credit scores are risk indicators. Lenders evaluate the risks associated with each loan and higher risk borrowers can be charged a higher rate. [Note that risk-based pricing is still in its infancy in Australia and is mainly used by peer-to-peer lenders.]

Every time you apply for credit you add to your credit history. This history is stored in a file held by a credit reporting agency and there are lots of these agencies around the world. Equifax Australia (formerly Veda Advantage) is the largest credit score provider in Australia and has credit information on 18 million Aussies.

According to comparison website, Finder.com, your Equifax Score is displayed as a number which indicates the likelihood of an adverse event being recorded on your credit file in the next 12 months. The number is rated on a five-point scale, as shown below.

  • Below average to average (0-509). It's more likely an adverse event will be recorded on your file in the next 12 months. You are in the bottom 20% of Equifax’s credit-active population.
  • Average (510-621). This score suggests that it’s likely that you will incur an adverse event in the next 12 months. Your score places you in the bottom 21-40% of the credit-active population.
  • Good (622-725). Adverse events are less likely to be recorded for the next 12 months. You fall in the mid-range (41-60%) of Equifax's credit-active population.
  • Very good (726-832). Unfavourable events are unlikely to be recorded in your credit file within the next 12 months. Your score places you in the second-highest percentile range of the credit-active population (61-80%).
  • Excellent (833-1200). Adverse events are highly unlikely to happen within the next 12 months when compared to the average Australian. The odds of no adverse events occurring on your credit file in the next 12 months are five times better than the population average and you are in the top percentile range (81-100%).

Credit agencies use an algorithm to determine your credit score. Like Google’s search engine algorithm, the exact math behind how credit scores are calculated is a secret. However, not knowing the precise formula does not mean that we are completely in the dark.

We know that a good credit score is driven by a range of factors including your payment history, the amount you currently owe, the length of your personal credit history, the amount of new credit you have recently acquired, and the types of credit you currently use.

More specifically, consumer website Canstar lists 10 things that you should avoid to maintain a healthy credit score:

1. Missing a repayment;
2. Maxing out your credit limit;
3. Applying for balance transfers too often;
4. Closing credit cards that have a good repayment history;
5. Applying for several credit or loan products at once;
6. Getting a judgement;
7. Ignoring errors on your credit report;
8. Not alerting creditors when you change your name;
9. Borrowing money to boost your credit score; and
10. Not regularly checking your credit report.

Canstar quite rightly notes that it’s not just your credit cards and loans that you need to pay on time. Your phone plan and utility bills will also show up on your credit history if you don’t pay them on time every month. Further, a lack of stability in employment and/or frequently changing address will pull down your score.

You can obtain a copy of your credit score by going direct to Equifax Australia or to Dunn & Bradstreet. (Note: The Dunn & Bradstreet score ranges from 0 to 1,000). Every 12 months - on request - each credit agency must provide you with a free copy of your credit report. You can also go to Get Credit Score for a free credit score.

While you can obtain a copy of your score, please note that you are not the real customer – lenders are. Note also that not every lender in Australia uses a credit score to assess home loan applications and other credit facilities. Each lender has its own credit criteria based on its risk appetite.

Loans are a necessary part of life for most of us as they provide the money required to achieve our goals. Armed with a good credit score, you’ll be one step closer to making your dreams a reality.

Regards,
Paul J. Thomas, CEO

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CEO Paul Thomas