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What is a Credit Score?

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Credit refers to someone’s ability to borrow and pay back money. In fact, your credit score is a key factor that lenders take into consideration before approving a loan.  

Lenders use a borrower’s credit score to gauge their ability to repay their loan. The higher someone's credit score is, the better their chances are of getting a good deal on their loan. 

To help you understand credit and how it affects your loan application, we answer a few pertinent questions: 

What is a credit score? 

A credit score or credit rating is a way for lenders to assess a person’s creditworthiness. It’s a compilation of your borrowing and repayment history. It also includes rate shopping or how many times you’ve requested a quote from lenders. 

Your credit score helps lenders work out if you can afford a loan and your likelihood to make payments on time. It also aids lenders when determining the interest rate on your loan and how much you can borrow. See how much you can borrow with your current credit rating using our borrowing capacity calculator

What is a credit score report? 

A credit score report is a summary of your credit history and your credit score. Your credit report gives lenders much-needed information about your financial situation. It includes information such as: 

  • Personal details 
  • Financial information 
  • Payment history 
  • Credit limits 
  • Loans 
  • Defaults on bills or debt 
  • Credit applications 
  • Credit report requests 

You can get your credit report from the three major credit reporting agencies in Australia which are Equifax, Experian, and Illion (previously Dun & Bradstreet). These credit bureaus track credit history and collect credit data which they use to create credit reports. 

Not all lenders report information to all the credit reporting agencies. This means the results of your credit report may vary depending on which credit reporting agency it came from. You can access your credit report online or contact one of the credit reporting agencies for a free credit report. 

Always check your credit score report thoroughly. Let the credit reporting agency know if there are any errors so they can be corrected. 

What is a good credit score? 

Credit scores typically range from 0 to 1000 or 1200 depending on the credit reporting agency. The rule of thumb is the higher your credit score is, the easier it is for you to qualify for a loan with a good interest rate. 

Each credit reporting agency has a metric when it comes to quantifying credit scores. Here are the five bands your credit score can fall into:

Rating Equifax Experian Illion
Excellent 853 to 1200 800 to 1000 800 to 1000
Very Good (Great) 735 to 852 700 to 799 700 to 799
Good 661 to 734 625 to 699 500 to 699
Average (Fair) 460 to 660 550 to 624 300 to 499
Below Average 0 to 459 0 to 549 1 to 299

If your credit score is excellent, you’re part of the top 20% of borrowers and lenders believe you’re unlikely to miss repayments. Credit scores that range between very good (great) and good are still seen favourably by lenders because they’re likely to make regular loan payments. 

Lenders may be more wary of those with average (fair) and below average credit scores because these borrowers are seen as more likely to miss loan repayments. You may still get a loan even with a bad credit score, but you may have to pay higher interest rates. 

Can you improve your credit score? 

For those whose credit scores fall into the low end of the spectrum, don’t worry! There are still ways you can boost your scores and improve your chances of qualifying for the loan you want. Here are some tips that can help improve your credit score: 

  • Make sure your credit report is accurate – if there are any mistakes or issues with your credit report, raise them immediately so they can be remedied. 
  • Pay your loans and bills on time – this includes loan repayments, credit card debt, and other bills. 
  • Limit your credit card applications – applying for several credit cards in a short span of time can signal financial desperation which won’t work in your favour. 
  • Diversify your credit – if you can manage different types of debt like a personal loan, a car loan, and credit card debt at the same time, it may boost your credit score. 
  • Be smart about your credit cards – lower your credit limit and don’t max out your credit cards to show responsible financial management. 

The suggestions listed above are simple but effective ways to help increase your credit score. If you want the best results, start as early as possible so your credit score is primed before you apply for your loan. 

Do pre-approvals affect your credit score? 

Yes, pre-approvals can affect your credit score. When lenders make credit inquiries, it can either be a hard or soft inquiry. A home loan pre-approval is a hard credit enquiry which means it’s recorded on your credit file and negatively impacts your credit score. Loan and credit card applications also require a hard credit check. 

Credit checks made by yourself, an employer, or an insurance company only require a soft inquiry. This type of credit inquiry isn’t listed on your credit file and won’t affect your credit score. 

A single pre-approval application is unlikely to be detrimental to your credit score. However, applying for a loan pre-approval with multiple lenders in a short time span could lower your credit score by a few points. Applying for pre-approval with different lenders could indicate that you’ve been rejected more than once. This isn’t a good look and lenders may assess you as a risky borrower.

Find out more about home loan pre-approval and car loan pre-approvals with loans.com.au.

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About the article

As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.

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