In this video, I’m going to do a deep dive into credit scores, what factors impact your credit score, what’s considered a good score and how you can improve your score.
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What is a credit score?
A credit score is a numerical score that represents how credit worthy you are as a borrower. Essentially, your credit score sums up the information on your credit report into one number.
Wait, what's a credit report?
It’s a record of your credit history. It can include information on applications for credit that you have made in the past, as well as info relating to your history of repaying credit card debts, personal loans and mortgages.
It can also include publicly available information, such as court writs and judgements related to bankruptcies, personal insolvencies and debt agreements.
Credit reports are prepared credit reporting agencies and in Australia, there are three main agencies: Equifax, Experian and Illion.
According to CBA, credit reporting agencies look at the following:
Your debt (past and present), including any problems you’ve experienced repaying that debt
Loans (and loan enquiries) you’ve taken out for household, personal or family reasons; or to buy, refinance or renovate a property; or as a guarantor for someone
Your credit cards and store cards
Your current credit limit
Accounts you’ve opened and/or closed
They will also check if you have a court writ or default judgment against you and look out for any history of bankruptcy.
Jumping back to credit scores, your credit score will sit somewhere on a scale of zero to 1,000 or zero to 1,200, depending on which credit reporting agency you go through.
Each credit reporting agency has their own method of calculating credit scores so what classifies as a ‘good’ credit score will depend on which agency you are referring to.
But generally speaking, a higher credit score is considered better because it reflects a more reliable borrowing track record, and therefore, a lower credit risk.
According to the credit reporting agencies, checking your own credit score doesn’t decrease it because it’s a soft inquiry and not a hard inquiry.
A hard inquiry happens when a financial institution, such as a bank or credit card company, checks your credit when they’re making a lending decision. They usually take place when you apply for a mortgage, loan or credit card, and you typically have to authorize them. Hard inquiries can affect your score because they indicate that you are actively seeking credit.
On the other hand, a soft inquiry is recorded on your file when someone checks your report for reasons other than you making an application for credit. For example, when you check your own credit score. Soft inquiries aren’t taken into account when calculating your credit score so you are never penalised for checking your score.
Remember, your credit score is not fixed. It is calculated based on what information is available at that point in time. Which means it can fluctuate as new information is added to your credit report.
Pay existing loans and debts on time
Pay bills on time
Think carefully before applying for any new credit
Check your credit report for any inaccuracies
Hold onto credit cards you can manage
Lower the limit on any credit cards you have
How to check your credit score?
An easy way to check your credit score is from an online credit score provider such as Credit Savvy.
If you want to get a free copy of your full credit report, you’ll need to contact Equifax, Experian and Illion directly.
According to the Office of the Australian Information Commissioner (OAIC), credit reporting agencies must give you access to your consumer credit report for free once every 12 months.