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Credit Score: Definition, Factors, & Improvement Tips (2023 Guide)

Nov 4, 2021 1:56:34 PM

No matter who you are or what your financial goals are, your credit score is important. Like it or loathe it, it is one of the clearest measures you have for assessing your financial health. Not only that but it is also used by banks, lenders, and more to determine your borrowing power and creditworthiness.

Your credit score stays with you throughout your life. In other words, it does not go away. Instead, it goes up or down depending on the financial decisions you make. The better your financial decisions, the higher your score will be. And, the higher your score, the easier you’ll find it to apply for attractive loans and new lines of credit.

If you’re unsure how to manage your credit score, don’t worry. This guide contains all the essential information that you need to know. Here’s what we’ll look at:

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Table of Contents

1. What Is a Credit Score?

what is a credit score

Put simply, a credit score is a rating attributed to you by a credit reporting body or agency. In Australia, there are three main credit agencies: Equifax, Experian, and Illion. All three of these agencies hold up-to-date financial information about you in their credit reports. Using their own calculations, they take this information and use it to determine your score.

The resulting credit score, also known as your credit rating, represents your profile as a borrower. It is based on your credit history and includes things like the number of accounts you have open, your past and current debts, and your repayment history. This information is supplied to the credit agencies by providers.

If you have ever applied for or received credit of any kind, you will have a credit score. It will fall between 0 or 1,000 or 0 and 1,200, depending on the credit reporting body. Read on for more information about how each agency calculates your credit score.

2. How Is Your Credit Score Calculated?

what is a good credit score australia

Credit scores are there to tell lenders how good consumers are at managing money. They are worked out with the help of complex algorithms and different agencies use different scoring models.

Typically, credit scoring models take into account your payment history, credit history, and any money you owe. So if, for example, you have a reputation for making late payments, that will have a big impact on your score. Less influential factors, including your credit mix and new credit, are also factored into the equation.

With a high credit score, you’re more likely to get accepted for loans. Plus, you’ll get access to better interest rates, discounts and other benefits when you apply. But high credit scores look different across the different credit agencies. Below is each agency’s credit score range.

Equifax Score Range

The Equifax credit score range starts at 0 and maxes out at 1,200: 

  • Below average: 0-505.
  • Average: 506-665.
  • Good: 666-755.
  • Very good: 756-840.
  • Excellent: 841-1,200.

Remember that what affects your credit score a lot with one agency might have less of an impact with another. It’s all down to the algorithms. So, if your score is middling with Equifax, it might just edge into a higher category with Experian or Illion.

Experian Score Range

Experian credit scores range from a minimum of 0 to a maximum of 1,000: 

  • Below average: 0-549.
  • Fair: 550-624.
  • Good: 625-699.
  • Very good: 700-799.
  • Excellent: 800-1,000.

Illion Score Range

Illion’s credit score range is also between 0 and 1,000: 

  • Zero:
  • Low score: 1-299.
  • Room to improve: 300-499.
  • Average: 500-699.
  • Great: 700-799.
  • Excellent: 800-1,000.

Soon, you’ll find out more about what it means when you have a “good/excellent” or “bad” credit score. First, let’s look at some additional factors that might impact your rating.

3. Factors That Impact Your Credit Score

what is a good credit score

So, we already know that your payment history, credit history, the amount owed, and more all contribute to your credit score. But those are far from the only factors. To keep your rating as healthy as possible, you’ll also need to have: 

  • As few credit enquiries as possible listed on your credit report.
  • No negative entries, including bankruptcy, court judgments, and defaults on your credit report.
    A stable home address.

What Can Negatively Affect Your Credit Score?

Of course, if you fail to achieve some or all of the above, this could negatively impact your credit score. So, if you don’t make payments on time, make a lot of credit enquiries, and move frequently, your credit score could suffer. Taking out high-interest short-term loans from payday lenders and allowing debt to mount can also have a damaging effect. 

Also read how payday loans affect your credit score 

You’ll learn everything you could need to know about boosting your credit score later on. Plus, you’ll find top tips on repairing your credit score rating if it’s lower than you’d like it to be.

4. Understanding Your Credit Score

what is a good credit score to finance a car

*Illustration is only representative 

If you’re unsure whether you need to work on your credit score, it’s worth knowing what the highest and lowest ratings mean. To see where your score falls, get a free credit score check. Getting a credit score check is easy. That’s because credit reporting bodies are required to give consumers access to their credit reports for free once every three months.

Here, then, is some more information about what the scores mean.

What Is a Good/Excellent Credit Score?

A good or excellent credit score reflects your reputability as a borrower. It demonstrates that you have been reliable with repayments and borrowed responsibly. It also suggests that your financial and living situations have both been relatively stable for an extended period. This brings with it several benefits.

Benefits of a Good/Excellent Credit Score

As mentioned earlier, with a good or excellent credit score, you’ll find applying for loans a lot easier. That’s because potential lenders and creditors will see you as a safe borrower. So, they’ll be more confident that you can repay your debt because you have done so consistently in the past.

And it’s not just your chances of approval for a loan that improve alongside your credit score. In addition, with a good or excellent credit rating, it’s also more likely you’ll be offered better loan terms. These might include reduced interest rates, higher principals, and fewer fees.

What Is a Bad Credit Score?

With a bad credit score, you are seen as a higher financial risk. So, if your score falls below the “good” or “average” categories, getting a loan or credit product will be harder. It tells lenders that you have struggled to repay debt in the past. As such, they won’t be as quick to approve you for attractive lines of credit.

Disadvantages of Having Poor Credit

Having bad credit increases the likelihood that your loan applications will be turned down. Many lenders choose not to take on customers who have a bad score. It’s unfortunate for the consumer, but it is in the lender’s best interests to stick to the most reliable borrowers. As such, it’s in your best interests to keep your rating as high as possible.

Another disadvantage lies in the fact that a low credit score can follow you for a while. Although your rating updates monthly, things like repayment history remain on your report for about two years. So, it will take time and work to build it back up.

5. Can I Get a Loan If I Have a Bad Credit Score?

what is a credit score ausloans

Just because it’s harder to get a loan when you have bad credit doesn’t mean it’s impossible. Any loan offers you get will, however, likely come with a higher interest rate attached. This allows the lender to compensate for the risk they take on by loaning you money. Alternatively, you can find offers specifically for borrowers with poor credit.

To find the right deal for your circumstances, use a loan comparison tool. At Ausloans, we’re proud to say that we have one of the best in Australia. We select and compare loans for you from a panel of over 40 of the country’s leading lenders. All you have to do is fill in a two-minute application and decide which loan suits you.

6. Understanding a Credit Report

bad credit score loans

Soon, we’ll discuss how to achieve an excellent credit score. Before that, though, you need to understand what a credit report is. That’s because your score is based on the information in your report. However, you don’t just have one. Just as each of the three credit reporting agencies gives you a different score, they also have a different credit report.

Here’s all you need to know about what a credit report is and what’s in it. Using the information in yours, you can spot where things are going wrong. That will make it easier to make positive changes to your rating.

What Is a Credit Report?

To reiterate what was said earlier, a credit report is an up-to-date record of your financial information. It details your current debt, history of repayments, and past credit applications, amongst other things. This information is used to calculate your credit score.

We already know that each of the three credit agencies – Equifax, Experian, and Illion – use different reports. In some cases, lenders will only report information to one or two agencies. In others, lenders won’t give out information at all. So, to get a well-rounded view of your financial health, apply to see each of your credit reports.

What Is In a Credit Report?

Your credit reports will include a two-year history of any credit products you’ve held and your repayments. All past credit applications, bankruptcy, and debt agreements, and credit report requests made by lenders are also included. And, if you have ever defaulted on a debt, you can expect to find that listed in your credit reports, too.

In addition, your reports will contain personal information such as your name, birth date, and home address. However, details on things like your income, bank account balance, or marital status are not included.

8 Top Tips to Achieve an Excellent Credit Score

what is a good credit score

If your credit score is less than excellent, there’s plenty you can do to improve it. These eight tips are a great place to start. Use the information in your credit reports to determine which tips best suit your specific circumstances.

1.    Build Your Credit History

When your credit history is short, it’s harder for credit reporting agencies to assess you. This has to do with the fact that they have so little information to go off. As a result, your credit score is likely to be relatively low. If you want to make yours better, you have to build your history. It takes time, but it’s so worth it.

There are a few simple steps you can take. These include opening up a bank account and always staying within its limits. Taking out a form of credit like a phone contract or your first credit card can be helpful too, so you can pay your bills fully and on time.

2.    Keep Credit Utilisation Low

If you have a credit card, avoid maxing it out. And, if possible, try to keep your utilization as low as possible. This could involve paying your balance in full each month. But, if you can’t, a good rule of thumb is to try and use just 30% of the credit in your account. It shows that you aren’t reliant on money that you don’t own.

Of course, this is much easier to do if you have a higher credit limit. 30% of $3,000 is $900, while 30% of $500 is just $150. So, if you want to keep your credit utilization ratio low while still spending more, apply for a credit limit increase. You can do so online with most banks.

3.    Pay More Than the Minimum Amount

Even if your credit utilization is low, it’s important to always pay more than the minimum amount. Again, this lets companies know that you have the means to manage your debt. Not only that but, if you only pay the minimum each month, you’ll stay in debt for far longer. That’s because the money remaining in your account will continue accruing interest, leaving you with more to pay.

4.    Make Regular Repayments

By making regular credit card repayments, you can show companies that you are responsible, reliable, and spending within your means. That looks great on any credit report. But, while many people opt to pay off their card once a month, it’s more beneficial to do so weekly.

For one thing, making smaller repayments means you’re less likely to overspend week to week. So, it’s a better way to manage your money and ensure you always pay your balance in full. For another, if you reduce your balance more often, you also reduce the amount on which interest accrues. As such, you’ll end up having to repay less each month, even if you spend the same.

5.    Consolidate Debts

Even if you’re good at repaying your debts, you could benefit from a debt consolidation loan. They’re a great way of paying off all your existing loans at once and replacing them with one personal loan. So, you’ll only have a single payment to think about each month. And, if you find a consolidation loan with a great interest rate, you can pay off your debt faster.

6.    Keep Old Accounts Open

If you want an excellent credit score, it helps to keep your credit accounts open for longer. As we found out above, companies like borrowers with long credit histories. It shows you can be trusted in the long term. And, if your repayment history on your accounts is good, it can work wonders for your credit rating.

Another reason why you shouldn’t close old credit accounts is that having one less can increase your credit utilization ratio. Say you use 30% of the combined credit from several cards. When you cancel one, your overall credit limit will fall. As such, the proportion of the credit you’re using will be higher.

7.    End Old Financial Associations

If you’ve ever opened a joint account with a partner, you have created what is known as a financial association with them. But, if you have since broken up, it’s in your best interests to sever those ties. You see, when your finances are linked to another person’s, it could be factored into your credit reports.

If that person’s financial management isn’t up to scratch, this could prevent your score from entering “excellent” territory. So, get in touch with the three major agencies either online or over the phone. You need to tell them that you and your partner no longer have any financial association.

8.    Review Credit Reports Regularly

Check your consumer credit reports as regularly as possible. Remember that you can do so for free once every three months and it’s a good idea to take advantage. By checking your reports regularly, you can see which of your score-boosting exercises are having the most impact. And, you can take note of any routines you’re in that are keep your score down. This makes it easier to change bad habits.

3 Steps to Fix a Poor Credit Score

what is a bad credit score

You might be less interested in how to improve your credit score than how to fix a poor one. It’s one thing edging a good score towards excellence, and another thing entirely to bring one back from the brink. Here again, though, there are things you can do.

Follow these three steps to repair a low credit score. Then, once it’s in better shape, take another look at the eight tips above. It could be a lengthy process, but any credit score can become excellent if you work at it.

1.    Pay Down Debt

Chances are that, if your credit score is low, you’ve struggled to repay your debts. And, as we already know, money owed is a big factor in your credit score. So, if you have unpaid debts piling up, your primary focus should be on paying them down. You might have to implement a short-term financial plan to do so effectively.

You could, for example, put a stop to credit card spending while you work towards paying what you owe. If you do, it helps to start with the card that has the highest interest rate. That way, you’ll slow down the rate at which the interest accrues.

2.    Avoid New Applications

Try not to apply for any new credit products while your score is low. This counts as what is called a “hard inquiry”, and every time you make one your score is temporarily impacted. For starters, you’re seen as more of a risk if you attempt to borrow money from too many different sources. For another, getting turned down for multiple loans looks bad to other lenders.

Keep in mind that not all credit inquiries are classed as hard inquiries. Keep reading to find out more about credit checks that don’t affect your score.

3.    Check Your Credit Report for Mistakes

Just as you should review your credit report for dos and don’ts, you should also check it for mistakes. You see, even slight mistakes can cause your score to drop. That’s the last thing you need if it’s already low.

So, make sure things like your name and address are spelled correctly. It’s also worth double-checking that your financial information has been correctly reported. Sometimes, lenders make errors and it’s up to you to spot them. If you find any, contact the appropriate credit reporting agency and dispute the mistake. This should have a positive effect on your score.

9. How to Check Your Credit Score

By now, you’ll know that checking your credit score is easy to do. For a full rundown of your rating, simply request a credit report from either Equifax, Experian, or Illion. All three agencies are legally required to let you see your credit report for free once every three months.

To request your credit report from all three agencies, get in touch by phone. It should only take a day or two to receive your report. In some cases, though, you could end up waiting 10 days. Their contact numbers are as follows:

It’s worth noting that you don’t have to request a full credit report whenever you want to check your score. 


10. Hard Credit Vs. Soft Credit Checks

what is the lowest credit score to buy a car

Requesting a credit report and viewing your credit score will not impact your rating either positively or negatively. That’s because they are both soft credit enquiriers. Hard credit enquiries or checks, on the other hand, will affect your score.

The difference between soft and hard credit checks is that hard checks occur when you make an application. This could be for a mortgage, credit card, personal loan, or another credit product. Just one hard check won’t have much of an effect but making several in a short space of time will. It suggests that you’re desperate to get credit, which is a red flag.

As such, it’s a good idea to soft check your credit score before lodging any applications. That insight into your financial health could help you decide whether applying for a new loan is the right thing for you right now.

Ausloans Soft Credit Check

Unlike a bank, when you submit an application with Ausloans we do a soft credit check, which means we do not leave an impression on your file as part of our assessment. The information in the form is retrieved to analyze loan options available for your specific circumstances without affecting your credit score. This means it will not show on your credit file as a “declined” if your application is unsuccessful. Your credit score only gets affected if when, after discussing loan options with your broker, you decide to go ahead and an application is submitted to a lender.

11. Your Credit Score in Summary

Your credit score is an unavoidable fact of everyday life. You influence it every time you make a purchase on your credit card or apply for a loan. So, you need to learn to look after it properly. And, with our top tips and simple steps, it’s never been easier. Whether your credit score is low and you want to pull it back or it’s teetering on the verge of excellence, this guide can help.

Or, for more in-depth financial support read our Car Loans Guide or contact the Ausloans team. We have more than 150 expert asset finance brokers on staff to assist you. If you’re looking to apply for the right loan for your circumstances without damaging your credit rating, get in touch.

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