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Posted on 2018-06-23

A beginner's guide to credit scores

More and more people are learning about credit scores because it directly impacts our ability to get affordable finance for all of life's expenses.

Your credit score becomes really important when you are applying for a personal loan, car loan, marine loan, bike loan, home loan, refinance. Basically, any type of finance application requires an assessment of your credit score.

This guide will help you understand what a credit score is, who has a credit score, how this score is calculated and how your credit score impacts any applications you make for finance.

What is a credit score?

A credit score, also referred to as a credit rating, is a number from 0 to 1,000 (or 1,200 depending on the reporting agency) which indicates to a lender the risk involved in lending to you. The score is calculated based on the information contained in your credit report.

What is a credit report?

A credit report is a document which outlines your credit history including your applications, the status of your applications and more. In 2018, comprehensive credit reporting started in Australia. This means that in addition to being able to see what products you have applied for, unpaid debts and debt agreements, lenders can now also see your repayment amounts and how often you pay your debts on time, as well as other behaviors associated with your credit file.

Who has a credit score?

Anyone with any type of credit arrangement including phone plans, utilities, credit cards, store cards, personal loans and home loans will have a credit score associated with their credit report.

How is a credit score calculated?

A credit score is calculated based on level of information contained in your credit file. This information includes:

  • The types of credit providers you have used
  • The total amounts of credit you have borrowed
  • Have many times you have applied for credit
  • What amounts you have unpaid or overdue
  • Any debt agreements you might have in place or bankruptcies faced
  • When your score is calculated the number is then scaled across 5 categories. The categories are:

    Excellent - this rating indicates you are very unlikely to experience adverse events affecting your credit in the next 12 months

    Very good - this rating indicated you are unlikely to face adverse events affecting your credit for 12 months

    Good - this rating indicates you are less likely to experience an adverse event on your credit report in the next year

    Average - this rating indicates you are likely to experience an adverse event in the next year

    Below average - this rating indicates you are more likely to have an adverse event being listed on your credit report in the next year

    The information contained in your credit report will remain there for 5 years – but there are ways to improve your score.

    How does a credit score affect an application?

    When you apply for credit, especially loans or credit cards, your credit score may affect the interest rate you are offered. Borrowers considered to have higher risks, such as those with credit scores below average, are often unable to secure low rates from traditional lenders.

    If you have a low credit score and want to apply for finance, it's best to use a broker. A broker has the knowledge and experience to know which lenders to negotiate with so as to ensure you are in the best position for fast approval.

    If you are unsure about the health of your credit score, we can help. Call us on 1300 844 970.

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