Money - 25 Apr, 2019

What is a credit score and how is it calculated?

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Don’t know what a credit score is, in a funk with your rating or need some tips on how to bump it up? We’ve answered some frequently asked questions to steer you in the right direction.


What is a credit score?

A credit score helps a financial institution know whether or not they should lend you money or give you credit. Your credit score is determined by looking at your credit report, at a point in time, to determine how trustworthy you appear as a borrower.

A credit report is a record of your financial history from a range of sources such as banks, credit card companies and public records. Here you’ll find information such as late repayments, non-payments, the number of credit applications made and any personal insolvency agreements relating to bankruptcy.

A credit score reduces your credit report down to one number. A mathematical algorithm is applied to predict future behaviour. It’s simple – the higher the score the more trustworthy or credit-worthy you’ll appear to a lender. A lower score means you have a bad credit rating. This score regularly fluctuates depending on what you find in your credit report.

Why is my credit score important and what can it affect?

Your credit rating is important as it sways how much a financial institution is willing to offer you; this becomes your credit limit. It also affects other terms of the agreement including the interest rate.

How is my credit score calculated?

Your credit score is calculated by looking to a number of factors, including:

  • Your personal information, such as your age and place of residence
  • The type of credit providers you have previously used
  • The amount of credit you have already borrowed
  • The amount of credit application and enquiries you have made
  • If you have any unpaid or overdue loans or credit

Credit score bands are usually measured between 1-1,000 or 1-2,000. Equifax is Australia’s frontrunner in credit reporting. It has credit information for more than 18 million Australians and is used by a majority of lenders and credit providers.

Here are their credit score bands to give you an idea of the scale:

  • Excellent (833 – 1,200): You’re highly unlikely to have any adverse events arise to harm your credit rating over the next 12 months.
  • Very Good (726 – 832): You are unlikely to have an adverse event arise in the next 12 months.
  • Good (622 – 725): You are less likely to have an adverse event in the next 12 months.
  • Average (510 – 621):  You are likely to have an adverse event arise in the next 12 months.
  • Below Average (0 – 509): You are more likely to have an adverse event in the next.

Factors that can improve or decrease your score

Is it a good idea to find out my credit score?

Yes. It’s wise to check in on your credit score to see how it is going, especially if you’re looking to apply for a credit card or loan. Contrary to what some might say, this does not impact your credit rating.

You can a free credit rating from a bunch of online providers.

It’s a good idea to check with more than one provider to get a reliable credit rating. As your financial circumstances change, so does your credit rating.

Words by Michelle Elias

Got your credit rating in good shape and ready to apply for a home loan? Speak to eChoice, who can help you compare rates across up to 25 lenders.

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