How are credit scores calculated

How are credit scores calculated?

Last updated: 26 February 2020

Credit scores are calculated by an algorithm that uses information from your credit file.

The credit score is generated by looking at patterns in your credit history, characteristics of your credit profile, and aspects of your credit applications.

Patterns in your credit history can include:

  • Shopping around and making numerous applications to different credit providers within a short period of time will increase the number of credit enquiries on your credit file and is less favourable than having infrequent and fewer credit enquiries.
  • The spread of credit enquiries over time can influence your credit score. Older credit enquiries have a different level of risk associated with them than more recent credit enquiries.
  • Negative information such as defaults, serious credit infringements, bankruptcies, and court judgements are high risk indicators and can adversely impact your credit score.

Characteristics of your credit profile:

  • To assess risk, your credit score can factor in personal details such as your age, length of employment, and length of time at your current address.
  • The age of your credit history can impact your credit score. A credit file with a longer credit history will have a different level of risk than a newer file with a limited credit history.
  • If you are a director or owner of a company or business, your credit score will also consider the location of your business, the length of time your business has operated at its current address, and the credit history information contained in the commercial section of your report.

Aspects of your credit applications:

  • There are many types of credit available to consumers and each has a different level of risk. Your credit score accounts for both the type and amount of credit in your previous applications.
  • Similarly, each credit provider that makes an enquiry on your credit file has a different level of risk depending on what type of provider they are and the industry in which they operate. e.g. an application with a payday lender is seen differently to a bank or credit union.

Specific factors to consider include:

Too many accounts Having lots of credit accounts can be a sign of credit problems. If possible, think about consolidating your credit accounts and cards, while closing those you don’t need.
Enquiries Making multiple applications for credit can lower your score.
Repayment History Under the new Credit Reporting system the easiest way to improve your credit score is to make your repayments on time. A good method is to set up a direct debit or a diary reminder to ensure payments are made on time.
Default – impacts report for 5 years Try to avoid a formal default if at all possible. If you get behind on payments, make contact with the credit provider and try and negotiate a payment plan.
Court judgments Try to settle a dispute before it goes to Court. If you do have a judgment against you, make sure you pay it as soon as possible.
Bankruptcy Act – For a bankruptcy of an individual the retention period for the information is whichever of the following periods ends later (a) the period of 5 years that starts on the day on which the individual becomes a bankrupt; (b) the period of 2 years that starts on the day the bankruptcy ends Try to discharge, close or complete the Bankruptcy Act action as soon as possible. This will reduce the amount of time that your credit profile will be affected.


Next you might like to read ‘How are credit scores used’ and ‘How to improve a credit score’.