What's in a credit score?
Much like Bigfoot, the Loch Ness Monster, and the lost city of Atlantis, credit scores are one of the great mysteries of the world. What’s in a credit score? How are they calculated? We’ll attempt to solve the mystery here.
Credit reporting bodies (CRBs) use very fancy and complicated formulas to calculate your score. These formulas are heavily guarded secrets that we mere mortals will probably never know. What we do know, are some of the key factors driving your score.
Your score is based on the information a CRB has about you and this information can vary depending on the CRB for a few reasons. Firstly, each CRB has their own credit scoring model and they may weigh the categories of information differently. Secondly, each CRB will have data that is unique to them and not all credit providers submit data to every CRB. So the information each CRB has on you might be slightly different. Let’s take a look at the key information a CRB may hold about you.
BASIC PERSONAL DETAILS
A CRB may have basic information about your personal profile and will often use these details to estimate your score if they have very limited credit information about you. This information may include your name, age, current or last known employer, and current or last known address.
Your score considers the credit applications you have made in the last 5 years and how they are spread over time. Applying for every credit product known to man is what we in the biz call “shopping for credit” and doing this in a short period of time can lower your score because in the eyes of a credit provider, you may not look credit worthy.
Your score can also look at the type of credit you are applying for and the type of credit provider the application has been made through. For example, an application for a credit card can have a different impact on your score than an application for a home loan.
Savvy tip: Always do your homework before you apply for credit and only apply if and when you really need it.
CREDIT ACCOUNT INFORMATION
The CRB may hold information about your credit accounts. This can include the type of account you have opened, the date it was opened and/or closed, the name of the credit provider, and the credit limit of the account. These details can remain on your credit file for as long as the account remains open and an additional 2 years after the account is closed.
Each type of credit you hold and each credit provider you borrow from has a different level of risk associated with them. For example, a loan from a payday lender may have a different impact on your score than a loan from a bank.
Information about your credit accounts allows a potential credit provider to better assess your current situation and whether or not you are in a position to take on more credit. Using your credit account information to calculate your score is still relatively new in Australia, so you may find that your credit providers are not yet reporting any of this information about you to CBRs. Keep an eye out because it’s only a matter of time before you start seeing this information pop up on your credit file.
In simplest terms, your repayment history states whether or not you have paid your bills on time over the last 2 years. Only credit providers that hold an Australian Credit Licence can report your repayment history. This means that payments made to utility companies or telcos will not show up on your credit file, however defaults can still be recorded.
Credit providers like to see consistency so if you always pay your bills in full and on time, this can have a positive effect on your score. If you have a habit of missing payments because you’re in financial distress or you’re just someone who is forgetful, your score may be penalised as a result.
Recording your repayment history on your credit file was only recently introduced in Australia so you may find that your credit providers aren’t reporting your repayment history yet. However, you’ll see this start to ramp up in the future.
For more information, you might like to read our article about comprehensive credit reporting.
Default information such as overdue bills can stay on your credit file for 5 years and serious credit infringements can remain on your credit file for 7 years. This can severely damage your credit reputation. Potential credit providers want to know that you’re going to pay back the money you have borrowed so it is very important that you pay all your bills in full and on time.
If you’re having trouble meeting your repayments, get in touch with your credit provider straight away. They may be able to arrange a form of financial assistance for you before reporting a default on your credit file or sending your debts to a debt collection agency.
COURT JUDGEMENTS & BANKRUPTCIES
Court judgements and bankruptcies can be detrimental to your score and can seriously hinder your ability to access credit. Where possible, try to settle any credit disputes before they go to court and try to discharge, close or complete your bankruptcy as soon as possible. Acting quickly may help reduce the amount of time your score is affected.
Remember, when you apply for credit, the credit provider uses a variety of information to determine if you are credit worthy within their lending criteria and policies, so your credit score is not the sole factor determining whether your application is approved or rejected. However, credit scores are a great tool you can use to manage and track your credit reputation – if you haven’t already, get your credit score for free.