Having a good credit score in Australia can give you a major leg up for achieving your personal or business goals. Whether you’re looking to buy your first home, acquire a new car, secure a credit card, or get a business loan, your credit score can significantly impact your access to these things. We’ll break down what a credit score is, why it matters, and help you understand how to get yourself in a good position for a loan with favourable loan terms.
What is a Credit Score?
A credit score is a three-digit number that reflects your creditworthiness, which is your suitability to receive financial credit. This number is calculated based on various factors, including your credit history, payment behaviour, and how much debt you currently have. In Australia, credit scores typically range from 0 to 1,200, with higher numbers indicating better creditworthiness.
Why does a credit score matter?
Having a good credit score is crucial for several reasons. It can influence everything from loan approvals to interest rates. Lenders use your credit score to assess how likely you are to repay borrowed money. A higher score usually translates to better loan conditions, which can save you thousands of dollars over time.
What is a Good Credit Score in Australia?
A ‘good’ credit score is roughly 650+ but it does vary depending on the different lenders and their criteria. Here is a general breakdown of credit score categories:
- 0 - 549: Poor
- 550 - 649: Fair
- 650 - 749: Good
- 750 - 849: Very Good
- 850 - 1,200: Excellent
Factors that determine your credit score
Your credit score isn’t a random number; it's calculated based on several key factors:
- Payment history: This accounts for about 35% of your score. Timely bill payments and loan repayments boost your score, while late payments can significantly lower it.
- Credit utilisation: This refers to the amount of credit you’re using compared to your total available credit. Keeping your utilisation below 30% is generally a good rule of thumb.
- Length of credit history: The longer your credit history, the better. This factor reflects your experience with credit. For example, if you’ve had a credit card for a decade, that can help your score.
- New credit applications: Applying for multiple loans or credit cards within a short period can signal to lenders that you may be in financial trouble, which could hurt your score.
- Credit mix: Having a mix of credit types—like a credit card, a personal loan, and a mortgage—can positively influence your score.
For example, let’s say you got your first credit card. Naturally it’s an exciting time, but with all this new access to cash you started spending more than you should. You quickly realised that your credit utilisation was climbing above 50% and that was a good prompt to reign in the spending. You decide the wise thing to do is pay off a big chunk of your balance and not only improved your utilisation ratio but also increased your credit score as a result. Go you!
How to check your credit score in Australia
Knowing your credit score is the first step to achieving your next life (or business) goal. If you’re worried about your credit score, that’s an even better reason to check in and start getting control of your financial position. Like anything the financial world you‘ll always feel better knowing the facts (ignorance is not bliss). And the good news is, it’s pretty straightforward!
How you can check your credit score in Australia:
You can check your credit score in Australia through a credit score agencyy. There are several reputable agencies that provide credit reports and summaries of credit scores in Australia. The most well-known among them are Equifax, Experian, and illion. To obtain your credit report, you'll need to verify your identity by presenting official documents, such as your driver's license, passport, or Medicare card.
It’s worth noting that these agencies sometimes offer slightly different scores to each other because different credit reporting bodies may hold different information about you.
- Visit credit reporting agencies: There are several agencies, including Equifax, Experian, and Illion, where you can check your credit score.
- Free annual checks: Under Australian law, you’re entitled to one free credit report each year from each agency. This means you can check your score regularly without incurring any costs.
- Request your report: Fill in your personal details and identification on the website, and you’ll usually receive your report via email or post within a few days.
- Interpreting the report: Your credit report will provide your credit score along with information about your credit accounts, recent inquiries, and any defaults. The higher your score, the lower the ‘risk’ you are as a borrower, which increases your chances of receiving loans with more favourable terms. Conversely, a low score may result in higher interest rates or even rejection of your loan applications. However, there’s no need to worry if your score is low! Your credit rating isn’t permanent, and there are effective strategies you can implement to improve your credit score over time.
- Review: Make sure to review it for accuracy, as any errors can negatively impact your score.
Checking regularly can help you spot any issues
You might think that checking your credit score once a year is enough, but we recommend keeping an eye on it more frequently, especially if you're planning to make a significant financial decision soon. Regular checks can help you spot any potential issues before they become bigger problems.
How to improve your credit score
Improving a bad credit score largely depends on the reasons behind the negative impact and the severity of your credit issues. If you’ve only made a few recent mistakes, you might be able to improve your credit within a few months. However, if you have a long history of missed payments and poor credit management, it may take years to achieve significant improvements.
If your credit score isn’t where you'd like it to be, don’t worry! Here are some effective strategies to help you boost it:
- Pay your bills on time: Set up reminders or automatic payments to ensure you never miss a due date.
- Reduce outstanding debt: Work on paying down your existing debts, starting with those with the highest interest rates. This will not only improve your credit utilisation but also save you money in interest.
- Limit new credit applications: Soft credit inquiries usually don’t impact your credit score, but hard credit inquiries can. When you apply for multiple loans or credit accounts in a short period it can harm your credit score and raise red flags for lenders, indicating that you might be struggling financially. Only apply for credit cards when necessary.
- Monitor your credit score: Consider using services that offer free credit score tracking. This way, you can see how your efforts are paying off over time.
- Diversify your credit types: If possible, consider a mix of credit types to improve your credit mix. For example, having a small personal loan and a credit card can help diversify your credit profile.
What does your credit score mean for you?
Understanding and maintaining a good credit score in Australia can be essential for achieving your next personal or business goals. If you would like to know what your credit score actually means for you before you apply for a loan, including any tax considerations, then it’s important to check in with your accountant. We’re a CPA accountant and business advisors and always happy to help, just reach out to chat to one of our friendly experts.
More on credit scores in Australia
What is the minimum credit score for a home loan in Australia?
The minimum score varies by lender, but generally, scores above 600 improve your chances of approval.
How to check your credit score in Australia?
You can check your score for free through major agencies like Equifax, Experian, or Illion.
What is a good credit score in Australia?
A good credit score in Australia typically ranges from 600 to 700, with higher scores leading to better terms on loans.
Does Afterpay affect your credit score in Australia?
Afterpay and other Buy Now, Pay Later services can affect your credit score if payments are missed and reported to credit agencies.
Does Australia have Credit Scores?
Yes, Australia has a credit score system that plays a crucial role in determining eligibility for credit.
