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If you’re looking to apply for a mortgage, personal loan, or credit card, understanding how credit reporting agencies calculate credit scores can help set you up for the best chance of success. 

MONEYME has a free credit score tool and other products available to help you gain better financial literacy and make smarter financial decisions.

If you’ve ever completed a credit application form and found yourself asking ‘What is a credit score?’ the answer is surprisingly simple:

At the most basic level, a credit score reflects the level of risk you represent to lenders when you ask to borrow their money. The higher your credit score, the better you look – and the more likely you are to be approved. The better your credit rating, the greater your chances of being offered higher credit limits and lower interest rates. 

When discussing ‘What is my credit score?’ and how credit reporting agencies calculate credit scores, it’s important to note the difference between a credit score and a credit report. 

Your credit score, or credit rating, is a single digit – typically between 0 and 1,000 (occasionally 1,200 depending on the credit reporting body), where zero reflects bankruptcy and 1,000 reflects the end of the scale you’d ideally like to be on. 

Your credit report is a five-year summary containing every aspect of your credit history, from applications (and their outcomes) to repayments, credit limits, and liabilities.

Every person in Australia who’s ever taken out a loan or a credit card has a credit score. It was initially designed as a way for financial institutions to track and make impartial assessments of your credit and debt behaviours and to be reportable to the government if necessary. 

In the earlier days, your credit score was based purely on negative credit behaviours – you started out with a good score and lost points if you missed payments or defaulted on your credit. When lenders looked at your credit history, they were able to view five years of retrospective repayments. 

While this had its benefits, it became apparent that this manner of reporting was damaging the potential for many people to repair their credit score after experiencing financial hardship. So, changes to consumer credit reporting law resulted in the introduction of Comprehensive Credit Reporting (CCR). 

CCR tracks and records what the industry calls ‘positive credit behaviours’. Whereas previously, only the blemishes were recorded, modern money lending has recognised that our ever-changing society is placing more stress on borrowers than ever before – resulting in sudden and often unpredictable shifts in repayments. 

It also recognises that borrowing patterns have changed with society and that credit scores need to reflect the ebb and flow of consumer debt behaviour. There will be times when you have more debt – such as when you take out a loan – and your credit score may drop. As your debt decreases through regular repayments, however, your credit score may increase. 

With CCR, all your timely repayments count towards your credit health. This has helped countless Australians improve their credit score and get access to things like home loans much sooner than they thought possible.

When credit reporting agencies calculate a credit score, they take into account a number of different pieces of information that, together, form your credit report. Factors include the following: 

• How much credit you have borrowed in the past
• Your repayment history for any credit cards or loans
• Any credit limits currently in place, e.g., on a credit card
• How many applications you’ve made in the past, and how regularly
• Any bankruptcies, defaults, or court judgements attached to your name
• An estimate of your ability to pay your bills on time 

This information, combined with the income and expenses you will have outlined in your credit application, gives lenders a clearer picture of your current borrowing capacity and how likely you are to be able to meet the agreed-upon repayments on your requested loan or credit product without experiencing financial hardship. 

Using a free credit score tool is a simple way to keep an eye on your credit score and identify where and how to improve your credit score.

Repairing damaged credit can be tricky, but it’s not impossible. With the great changes introduced through Comprehensive Credit Reporting, it’s become much easier to take control of your financial health and improve the result when you calculate your credit score.

Recognising how credit works and identifying your credit behaviours is the first step towards good financial health. If you’re unsure how to do a credit score check, simply download our app and get a free credit score check using our new credit score tool. 

Now that you’ve got a clear understanding of how financial institutions calculate credit scores and where your credit score is at, it’s time to start making some changes. Speaking with a financial advisor or counsellor early on is always a good idea – regardless of your financial circumstances. Far from just being for the rich, financial counsellors are able to look at your life holistically as well as financially and help you understand and establish better financial behaviours. 

When working to improve your credit, one of the most important things you can do first is to evaluate your current financial situation. 

If you are in a tough financial situation and struggle to make repayments on time, enter into a payment plan or financial hardship arrangement for any of your debt repayments or bills you know you will be unable to make. By entering into such an arrangement, you’ll be able to prevent the missed repayments from being recorded on your credit report – and stop your score from being lowered. 

Next, if you have multiple credit accounts of the same sort, close any active credit accounts that you don’t need. While it might be tempting to keep these as a lifeline, multiple credit accounts could increase the level of perceived risk to lenders. As a general rule, keep the credit accounts that you’ve had for the longest time and have made timely repayments on, while repaying and closing the rest. 

If you have considerable debt across different credit products, combining them into a single debt consolidation loan can make your monthly repayments more affordable and make establishing consistency easier. Provided you don’t end up paying out more over time due to a longer loan term or higher interest, debt consolidation loans can be a useful tool to help you get back on your feet. 

Remember: everybody’s credit score ebbs and flows depending on the level and type of debt they are currently responsible for. Wealth does not equate to credit health, and the smartest way to improve your credit score is to know what’s impacting it and take control of your circumstances. 

Above all, demonstrating consistent, positive credit behaviours – i.e., making those regular, timely repayments – is the best way to increase your credit score and demonstrate your reliability as a borrower. The more of these you demonstrate, the more your credit score will improve. Simple.