Alex Ritchie* discusses how people’s everyday financial choices impact their credit score.
When it comes to applying for financial products, one of the best ways to bolster your application is to have a good financial reputation, meaning: a great credit score.
Your credit score influences your financial life, and a good or bad score may mean the difference in your being approved for a credit card, home loan or even a mobile phone plan.
Many Australians are unaware of what exactly their credit score is and may not stop to think about it until they’re applying for a mortgage.
Because of this, they may find themselves missing out on more competitive interest rates or even being rejected for a loan.
So, let’s explore why your credit score matters, how to make the most of a good credit score and tips on how you can boost your score if it’s not where you want it to be.
Why your credit score matters
A credit score is a number determined by a credit reporting bureau, based off an individual’s credit history, that helps determine your creditworthiness.
Put simply, it lets a bank see if you’re more or less likely to default on credit products or miss repayments, based on your past behaviour – both good and bad.
It helps determine whether an individual should be approved for financial products, such as a credit card or a home loan, and may also influence the interest rate they are offered.
There are two major credit reporting bureaus in Australia: Experian and Equifax.
You may apply to get a copy of your credit history for free from each of the major credit reporting bureaus, with one free copy allowed each year.
However, you can find out your credit score for free online in a matter of minutes.
There are a few factors and events that may influence your credit score and stay on your credit history for a number of years, including:
- Money you borrow.
- Repayments on financial products, such as credit cards, personal loans, car loans, home loans.
- Repayments on utilities, such as energy bills, gas bills and phone plans.
- Credit applications
- Defaults
- Bankruptcy
- Debt agreements
The impact of each of the above differs for the credit reporting bureaus in Australia.
Because of this, it’s hard to pinpoint exactly how much an event may increase or decrease your credit score, but it’s safe to say the more catastrophic events, such as bankruptcy, can be devastating.
The major credit reporting bureaus divide their credit scoring systems into five tiers:
- Excellent
- Very Good
- Good
- Fair
- Below Average
While your credit score may differ between the bureaus, it will always fit into the above five categories.
And why your credit score matters is simple.
For a credit card or loan application, having a ‘Good’ to ‘Excellent’ credit score may mean the difference in not only being approved for a loan but borrowing the amount you want and getting a competitive interest rate.
How to make the most of a good credit score
Now you know where your credit score sits across the credit reporting bureau’s tiers, you can discover just how far it may take you.
And one of the most important things to understand about your credit score is that it can help you to get discounts on financial products, such as home loans, credit cards and personal loans.
As a bank will assess your credit history, among other factors, when you apply for financial products, they will take into consideration your credit score when offering you an interest rate.
It’s long been known that the better your credit score the higher chance you have of being approved for the financial product and being offered a bank’s lowest loan interest rate.
This is because by having an excellent credit score, you’re showcasing the strongest level of creditworthiness.
This lowers the risk on the bank that you may default on the loan, and in turn they can offer you a lower interest rate.
So, if you have a good to excellent credit score, how can you take advantage of it? By nabbing a competitive interest rate and saving big on repayments.
For example, let’s take a look at personal loans.
Personal loan lenders typically do not disclose their credit score personal loan tiers.
However, RateCity.com.au reached out to a range of personal loan providers and 10 shared their personal loan tiers.
The results indicate that more competitive interest rates may be reserved for those with excellent credit scores.
Personal loan interest rate offered based on your credit score
| Credit Rating | Score Range | Secured Personal Loan Rates |
| Excellent | 800-1200 | 7.88 per cent – 10.63 per cent |
| Very Good | 740-799 | 13.13 per cent – 13.18 per cent |
| Good | 670-739 | 13.13 per cent – 13.18 per cent |
| Average | 580-669 | 13.13 per cent – 15.76 per cent |
| Below Average | 0-579 | 15.71 per cent – 18.87 per cent |
Source: RateCity.com.au. Data based off of Equifax credit score range. Secured personal loan rates accurate as of 07.04.2021. Figures provided by 11 personal loan lenders. See below for disclaimers*
Based on the above, if an individual wanted to borrow $10,000 on a secured personal loan over five years to pay for a holiday, there may be a significant difference in the interest rate they’re offered based on their credit score.
A borrower with an Average credit score may be approved for a $10,000 secured personal loan with an interest rate of 15.76 per cent.
Their monthly repayments would be $242.
However, a borrower with an Excellent credit score may only be paying 7.88 per cent and pay $203 a month.
This is a difference of $468 a year due to higher interest charges and may mean the difference in paying for an energy bill or weeks of groceries for an Aussie family.
How to boost your credit score
For many Australians who do know their credit score and credit history, the impacts of Covid-19 on their finances (including mortgage repayment deferrals, loss of income etc.) has been a point of financial stress.
In fact, a new RateCity.com.au survey of 1,005 Australians revealed one in six are concerned about their credit score in light of COVID-19.
Thankfully, there are a few options you have to boost your credit score and prevent it from falling further. This includes:
Go through your report with a fine-tooth comb.
Something you can do immediately to boost your credit score is to check your credit report for errors.
Many Aussies may not know that it’s not uncommon to have errors on a credit report.
For example, a family member or someone with the same name as you may have had their negative events accidentally applied to your credit report.
If you find any errors, immediately contact the credit reporting bureau to have these removed.
Hold off on that application.
An easy way to stop your credit score from falling is to hold off on applying for financial products until your score improves.
Making multiple applications does not reflect positively on a credit report and may lead to a lender rejecting your application, further hurting your score.
Further, if you have one or more of the following events in your credit history, consider holding off on an application until you can improve your credit score: multiple applications in a short period of time, missed payments, short term credit (payday loans), defaults, court judgements, open accounts with debt collection agencies or bankruptcy.
Add more positive events.
It’s not just your mistakes that may show on your credit history.
Thanks to Comprehensive Credit Reporting, positive events can now boost your credit score.
This may include paying your bills on time every month or quarter, including your phone bills and utilities and paying off outstanding debts, such as a car loan.
Boost your savings.
Growing a healthy nest egg of savings may be counted as a positive event by a credit reporting bureau.
But more importantly, making regular deposits into a savings account showcases to a bank that you’re more financially responsible.
If you’re hoping to boost a home loan application, for example, growing your savings and fighting the urge to dip into them may boost your chances of approval.
*These estimated ranges are for illustrative purposes only. Each lender will use different criteria to adjust its interest rates based on your credit score and more. No data or content published by RateCity is to be relied upon for any financial decisions. RateCity strongly recommends that you perform your own independent enquiries before making any financial decisions. We cannot accept responsibility for any loss or inconvenience caused by reliance on the material contained here.
*Alex Ritchie is a contributor at Life Hacker.
This article first appeared at lifehacker.com.au.
