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Your credit score can have an impact on how easy it is to apply for a loan, how much money a credit provider is prepared to lend you, and what rate of interest you will be offered; but how is a credit score calculated?
Before we answer the question ‘How is a credit score calculated?’ we need to understand why a credit score is important in the first place. So what is a credit score? Your credit score is a number that banks and other credit providers use when they are assessing your loan or credit application to determine how risky they think your loan will be. The credit score is worked out by using information that is included in your credit report. This information comes from a range of sources; and it includes data such as the credit products you’ve held in the last two years, your repayment history, the number of credit card applications you have made, and more.
Your bank or credit provider can use the information in your credit report to see how you have handled your debts in the past. This will help them to determine how creditworthy they perceive you to be and whether they think you will be in a position to be able to pay your loan back. Your credit score can help them decide not only whether they are prepared to lend you money, but also how much money they will lend you, what your interest rate will be, and the loan terms they will offer you.
If you find out how to check your credit score yourself before you apply for a loan, it can help you get a better idea of whether your loan is likely to be approved or whether you need to try to increase your score before you submit your loan application. A high credit score can give you negotiating power when discussing the interest rate and loan terms. As your credit score can go up and down depending on your financial behaviour, you may want to do a credit score check regularly so you can keep track of how you are going.
Given your credit score can impact whether your loan application is successful, it’s important to know the answer to the question ‘How is a credit score calculated?’ and determine what you can do to improve it. In the past, it was mainly negative information that was available on your credit file such as credit enquiries and default listing; but with the introduction of Comprehensive Credit Reporting (CCR), now both positive and negative information is recorded on your credit file, giving lenders a more comprehensive view of your credit information. This information can include account open and close dates, credit types, account limits, and repayment history information (RHI) for the last twenty-four-month period. Your RHI status is displayed as a number indicating how many days in arrears your account was in, in a specific month. The RHI status is reported for your active account on an ongoing basis until it is repaid.
Your credit score is calculated based on the information in your credit report. A typical credit report includes information about each credit product you have held in the past two years (including credit limit, credit provider, the opening and closing dates of the account, your repayment history, and more). If you have defaulted on your utility bills, loans, or credit cards, the provider may also report this to the credit reporting agency. Your credit report will also include any credit applications and credit report requests as well as any court judgements, personal insolvency agreements, bankruptcies, or debt agreements. All this information will be taken into account by the credit reporting body when they do your credit calculation.
There are three main credit reporting bodies in Australia, and because credit score companies use slightly different algorithms to calculate credit scores, your credit score may be different depending on which credit reporting body calculated it.
Rather than having to calculate your credit score yourself, credit reporting agencies are obliged to give you a copy of your consumer credit report for free every three months. To do this, you can contact the reporting bodies directly (you may have a credit file with more than one as they may hold different information about you). You should be able to access your credit record report online within a couple of days, but it can take longer if you get it via email or by mail. If you want to find out your actual credit score, some reporting agencies may also be able to provide this for free too, but if not, there are several online credit score providers including Canstar, Finder, or Credit Simple who will be able to provide you with your credit score at no cost.
Your credit score changes over time, so if you are thinking about how to improve credit score, there are several things you can do. Firstly, it is very important that you make all your loan and credit card repayments back on time and pay your utility bills by their due date. You may even want to consider consolidating your debts if you are finding it hard to keep track of your repayments. You could also consider reducing your credit card limit if it is higher than you need. Making a lot of loan applications can also have a negative impact on your credit score. For more information about what is included in a credit report, how your credit report is calculated, and how to increase credit score, head to Australian Securities and Investments Commission’s Moneysmart website.
So how do you know what is a good credit score in Australia? The three main credit reporting agencies in Australia – illion, Experian, and Equifax – rank their credit scores slightly differently, so to see what range (such as excellent, very good, average, fair, and below average) your specific credit score falls into, you’ll need to check with the particular credit reporting agency. Within each credit scoring agency, the higher the score the better. Both illion and Experian provide credit scores between 0 and 1,000, and with Equifax, your credit score will be between 0 and 1,200. Some lenders also use an internal credit scoring system when assessing your loan. For example, MoneyMe has a rating score from A1+ to A5+ that they assign to their customers. If you make all your repayments on time, your MoneyMe rating increases, which will mean next time you apply for a MoneyMe loan, you may be able to borrow the money at a lower rate. It is worth doing a credit health check regularly as a good credit score can help you when negotiating your loan.
How Is a Credit Score Calculated?
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$295 for loans between $2,100 and $5,000
$395 for loans between $5,001 and $15,000
$495 for loans between $15,001 and $50,000
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*This comparison rate is based on an unsecured personal loan of $30,000 for a term of 5 years. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. A $495 establishment fee and $10 monthly fee applies.