Institutions that lend money such as banks, credit card providers, mortgage lenders, and finance companies use credit scores as a way to assess the credit worthiness of a person. A credit score evaluates whether the borrower can afford a loan, and it can also determine their interest rate, and their credit limit.
What is a good credit score?
A credit score is a number that ranges from 0 to 1200. In general, the higher the score you get, the easier it is for you to qualify for a loan and it may result in a better interest rate.
- 0- 509 (Below Average) If you get this score, it means that you are in an unfavourable situation (for example, subject to bankruptcy or court judgment). It is more likely that an adverse event will be recorded in the next 12 months.
- 510-621 (Average) Your score is in the bottom 21-40% of the credit active population. This suggests that adverse events will likely to occur for you in the next 12 months.
- 622-725 (Good) This score suggests it’s less likely an adverse event will happen that could affect your credit report in the next 12 months.
- 726-832 (Very good) Your odds of keeping a clean credit report are two times better than the credit-active population. Adverse events are unlikely to happen in the next 12 months.
- 833-1200 (Excellent) You’re in the top 20% of the credit-active population. It is highly unlikely that an adverse event would occur which could harm your credit report in the next 12 months.
How are credit scores calculated?
Lenders across Australia calculate your credit scores by using the information on your credit reports. These include:
- Your basic personal details – they will look into your age, the term of employment, address, previous address and driver’s license.
- Type of credit providers you have used in the past – Each lender, bank or financial institution has different risk levels.
- Credit enquiries you’ve made – Making multiple loan applications can lower your score.
- Default information – Personal or business credit reports such as unpaid debt and serious credit infringements can affect your score negatively.
- The amount of credit you have borrowed – Mortgages are seen as lower-risk than credit cards.
- Bankruptcy history – Any debt agreement or personal insolvency issues relating to bankruptcy will bring your score down.
There are websites that provide you with your credit scores for free such as, Creditsavvy, Getcreditscore, Creditsimple, Checkmyfile and many more. Results may vary depending on which credit reporting agency is used.
How to get a good credit score?
Your credit score can change over time depending on the information contained in your credit report. It’s very important that you manage your finances well. Here are some things you can do to make sure your score remains high.
- Pay your mortgage and other loans on time
- Pay unpaid credit card debt or loans
- Limit your credit enquiries
- Lower your credit card limits
- Don’t apply for credit you don’t need and can’t pay for
- Make your monthly repayments on time
Lenders decide if they will lend money to you based on your credit score. Knowing your credit score and maintaining a good reputation in your credit report can increase the possibility of getting any loans such as home loans, car loans and investment loans.