What do I need to know about Credit Scores?
- Kayden Mitchell
- Aug 18
- 7 min read
"What is a credit score?"
This seems like a reasonable question with which to start. A credit score is a rating that a credit reporting agency provides to lenders that gives your credit worthiness on a numerical scale. The greater the number, the less of a risk you are. There are three main credit reporting agencies in Australia: Equifax, Experian and Illion. Equifax scores go from 0-1,200, whilst Experian and Illion go from 0-1,000. Each will likely give you a different score. In general terms, the higher the score, the more favourable a lender will see you. More about this later.
"What is credit?"
Anytime you are provided with something before you have paid it off, you are said to have received credit. For example, a car loan is credit because you get the car before you've finished paying it off. A credit card is credit because you are allowed to use the cash before needing to pay it back. Other forms of credit you may not have considered are telco or utility accounts because you use the service before you pay the bill, and the big one that catches people out in the modern age is dreaded "buy-now-pay-later" accounts. Taking home that (insert desirable item that you just couldn't wait for here) and paying it back in 4 repayments? Yep, credit.
"How do they know who I am?"
Well, when you get any form of credit, like the ones mentioned, the company that gave you the credit took all your details (address, loan type etc) and may report that information to a credit reporting agency. Then, they will report each month thereafter on whether you have paid off the credit on time or not. This can seem a bit intrusive, but this is the way that lenders try to ensure that a client hasn't, say, just received 5 loans from 5 different lenders before coming to them. It is worth noting that not all companies will report to a credit agency or even all of the main credit agencies. One particular lender might only report to one credit agency. To be honest, a good broker may even exploit this by using the credit reporting agency that gives you the highest score if they know which lenders use which agency.
"Why are scores different between different agencies?"
We touched on one reason in the previous question: not all credit companies report to all agencies. Obviously, if one has less information than another, that will affect things. The main reason, however, is that each agency uses its own algorithm to work out your score. The worst part is, they won't tell anyone the algorithm. One agency may put more emphasis on your residential status in the last two years and how consistent that was (They know based on the details you gave when getting credit). Another agency may focus more on how many enquiries you've had in the last 5 years. The agencies will definitely factor in the types and size of the loans. Other potential factors are age, postcode, how old your credit score is, plus more.
"What does a broker or lender SEE when they get your score?"
We will see any credit that you've applied for, or enquired about over the last 5 years that has been reported to that particular agency. In some cases, this may be no credit queries at all, but for some clients we have seen times where there are over 60 enquiries! Of the approved applications, we will be able to see the repayments you've made over the last two years. We will also see a summary of the things that the credit agency thought were pros and cons on your profile, any hardship payments, paid or unpaid defaults (within the last two years), plus any accounts that are currently still open.
"So what is good and bad for your score?"
Interestingly, having a successful application for a loan will actually DECREASE your score, regardless of whether it is a car loan, credit card, home loan etc. The good thing about being approved, though, is that each month you pay it back on time, your score recovers. If you didn't have a successful application, however, you will lose some score and not have the opportunity to improve it by making repayments. Generally, people who have had a larger loan for a longer time with no missed payments will have the best credit score. (Don't hate on us, but that means mortgage holders often have the best scores). You may have already worked out that having a smaller loan then, may actually have a negative result for you because it doesn't take as long to pay back and doesn't have large repayments, and you'd be right. Small loans (also known as Small Amount Credit Contracts, SACC) often are seen to exploit consumers. They are loans like those seen with pay-day lenders and can entrench disadvantage with unsuspecting people. Of course, not all people who get a small loan get it because that is all they can afford, some will do it thinking that getting small loans shows that you are financially responsible and often buy things with cash. Problem is, lenders don't see you spend cash, so they can't 'judge' your creditworthiness based on it. In fact, if you are the type of person who only gets small loans, please look to get a score check soon. Saying all this brings us to our most-hated of all credit forms (worse than credit cards, if you can believe that!)...Buy-Now-Pay-Later accounts. Yes you, ZipPay, AfterPay, ICan'tAffordToPay (Not a real one, but might as well be). Why are these the worst? Because, just having an account reduces your score! That's right, regardless of how large the account is, how well you pay it back, how frequently you use it, or even what the balance is, it WILL REDUCE YOUR SCORE. If you have one and don't use it, formally close the account and have a free credit score boost on us!
"What does the higher score actually do?"
A higher score means that you are 'trustworthy' and 'desirable' as a customer. Basically, the lender knows you're low risk and can bank (pun intended) on making interest off you. That means that they can offer you a lower interest rate. The lower interest rate for you means savings over the term of your loan as you will pay less interest than that person who was deemed less appealing. Interestingly, credit scores aren't super important for mortgages, you just need to pass the benchmark and you'll be offered the same rate as the next person. Interest rates are much more affected by credit scores when applying for personal loans. How much difference, though? We'll chat about that further along.
"I've got a weak score, what can I do?"
There are a few options here:
1. If you can still get a medium to large loan, you could take it out, make sure you pay it properly over, say, a year or two to improve your score, then refinance the loan. Each loan will reduce the score again, but the overall trend will be upwards.
2. Look to reach out to lenders who may have incorrect queries on your credit report. Sometimes, you may have had a double up query on your report. Reach out to the lender to remove one. This may give a score boost.
3. If you have any defaults that are paid down, there are agencies who might be able to clear that from your report. It will likely cost you $1000+, but the savings due to a reduced interest rate should be better, if the loan is significant enough. Spend money to save money!
4. Wait until some of the queries from 5 years ago are gone. Remember a report only shows 5 years. You may have been a little more impulsive 5 years ago. Typical past you making current you suffer!
"Anything other advice?"
1. Get yourself a free credit score check once every three months. We once had a client who had a loan on their credit report that they didn't get at all. Somebody else had taken out the loan and never repaid it (of course) and this person was lumped with a default on their credit score. Options for removing these mistakes are: getting a credit clearing agency to help, approaching the agency yourself and approaching the credit provider and asking them to remove the issue.
2. Don't just go to some random site on the web or a free app and get a "free credit check". Go to the actual Equifax (mostly for personal loans), Experian and Illion sites or apps to get a free check once every three months.
3. Interest rates are not the be-all and end-all for personal loans. Example: $50k loan, (plus all fees), 7 year term at 10% ~ $203/week. Same loan at 15% ~ $235/week. Now, getting that $32 cheaper option is definitely preferred, but the 5% increase doesn't very often take a loan from being easily affordable to not affordable at all.
4. Get your credit score started young. Lenders rely on past history to predict future outcomes.
5. Avoid loans under $5k. Either save up and pay it outright, or look to get a bigger loan that you can afford, to cover a couple of things. This will give you more chances to recover and improve from the credit.
6. Try to keep enquiries to 5-8 times over a 5 year period. This isn't a fixed piece of advice, but it does appear that credit reporting agencies don't like too much or too little credit seeking.
7. Good brokers will help you and guide you if you need to improve anything. They should discuss whether you need credit now or in the future and can give you tips on how to improve your creditworthiness. They shouldn't be rushing you to the first product they can find that fits.
Of course, all of this is just general advice based on our experiences. It isn't designed for anybody as an individual and your circumstances could be completely different. Take this all as it is intended to be - light information that hopefully has a sprinkling of something useful in it.
Make sure to check out the Geelong Tiny Home Expo!
The team at GE finance are going to be there and doing the finance talk so check it out. It is on from the Fri, 5th - Sun, 7th September, link for tickets below.
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