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Understanding Your Credit Score |

Understanding Your Credit Score |
Written by Publishing Team

How does a credit score work?

When applying for credit – such as a credit card or loan – your credit score is a very important number. But how does it actually work?

You may have heard of a credit score; You may even know what your credit score is. But understanding exactly how they work can give you invaluable insights into how lenders evaluate your applications, what makes a credit score good or bad, and how you can improve your score if you get hit.

In this article we will discuss:

What is a credit score?

A credit score is a number calculated by one of Australia’s credit reporting offices – Equifax, Experian or illion – to represent your credibility as a borrower. These three agencies operate completely independently of each other, which means you may have up to three credit scores with slight variation in each. We’ll get to why in a moment.

Your credit score is generated based on the information on your credit report. Think of your credit report as your school report card and your credit score as your final score. It will usually range from zero to 1000 or 1200 (depending on the credit reporting bureau). It is used by lenders to determine your eligibility for certain credit products, as it gives them an indication of your financial management skills.

If you have a “good” credit score, you will likely have access to things like a lower interest rate, the ability to negotiate your terms, and more. But if you have a “bad” credit score, you will likely need to pay a higher interest rate, have little or no negotiating power, and even be limited in your ability to borrow as well as the lenders you can borrow through.

How is your credit score generated?

As mentioned, your credit score is generated based on your credit report. Credit reporting bureaus prepare your credit report and subsequent credit score based on the information communicated to them; This is why you may have a slightly different score with each agency. Let’s illustrate this with a quick hypothetical example.

Suppose you have a personal loan. You have been a diligent borrower in the past, but you ran into some financial problems and ended up defaulting on your loan. Your lender only reports this default to Equifax, which then goes to your Equifax credit report. So, your credit score with Equifax is worse than your credit score with Experian and illion.

This is the short answer on how to build your credit score; The long answer is a little more complicated.

To understand this, we must discuss the two types of credit reports used in Australia: comprehensive credit reports (CCR) and negative credit reports. All credit reports and scores used to be generated using negative credit reports, but CCR was introduced to provide a more comprehensive understanding of a person’s borrowing and repayment history, hence the name.

Negative credit reports

What was once the norm (and is still used by some small lenders), negative credit reporting means that the lender only offers Denial Person’s borrowing habits for credit reporting bureau(s). These adverse events can include:

  • late payment

  • Missed Payments

  • Apply for multiple loans or credit cards within a short period of time

  • Reject loans and credit cards

  • Missed invoices of $150 or more that are more than 60 days past due

  • Bankruptcy or serious credit infringement

This information can remain on your credit report for up to seven years, and therefore will affect your credit score during this time.

Comprehensive Credit Reports (CCR)

Comprehensive credit reports, also known as positive credit reports, provide potential lenders with a more comprehensive picture of an individual’s borrowing history. Not only will the negative behaviors of the borrower be reported, but their positive behaviors will also be reported. This way, any lenders or people who view the credit report will have a better idea of ​​the behavior of the mentioned people and their reliability as a borrower.

On a positive credit report, the following information will likely be included:

  • Account opening and closing dates

  • Credit limits (not how much you pay)

  • Number of repayments

  • The type of credit applied for

  • Up to 24 months from the date of payment

Despite its introduction in 2014, most lenders have been too slow to hop on the CCR train. To speed up the process, the Big Four banks have been tasked with fully adopting CCR into their credit reporting systems by September 2019 – and they have done so. But by September 2022, all lenders will be mandated to use a CCR when reporting credit information.

How many credit reports do you already have?

Since there are three credit reporting agencies—plus two different types of credit reports—you are likely to have up to six credit reports; One of each type (positive and negative) with every credit reporting bureau.

Most lenders will only use one credit reporting desk to access your credit report – because getting a copy of your credit report costs money. You can access your credit report for free once a year, but lenders have to pay to access this information. That’s why they only look at one or maybe two of your credit reports, but with only one credit reporting bureau.

Credit scores and credit reports can be confusing and complex. Not to mention it’s still a bit mysterious. Most credit reporting agencies are pretty enthusiastic about how they actually rate you – even though we have a general idea.

What information makes up your credit score?

Unfortunately for us, credit reporting agencies are a bit like Mr. Krabs – they keep their secret formulas tight. While we don’t know exactly how they came up with your credit score, we do have a general idea of ​​what actually affects your credit score. So there is no need to go to Plankton and try to steal the formula.

Factors that can affect your credit score include:

  • date of payment

  • Total Amount Due

  • Length of credit history

  • Types of credit

  • new credit

All of these factors combined will spit out a credit score with every credit reporting bureau. But the weight of each factor can differentiate the agencies.

What is considered a “good” credit score?

Credit scores are determined on a five-point scale: excellent, very good, average, fair and low. With this in mind, we’ll consider all credit scores ranging from excellent to average as a “good” credit score.

Not only do each credit reporting bureau calculate its scores differently, but they also have different metrics by which they measure their credit score.

credit score range





800 to 1000

833 to 1200

800 to 1000

very well

700 to 799

726 to 832

700 to 799


From 500 to 699

622 to 725

625 to 699

In general, a credit score between 500 and 700 is considered average. An average credit score might be the minimum required to get a loan through a major bank or major lender — or at least one with a decent interest rate. It may also affect your eligibility for a home loan.

If you had a “good” credit score, you were probably a smart borrower – you pay off your loans on time, stick to your credit limit, don’t apply for too many loans at once, etc. As a result, you may be offered a competitive interest rate on your credit products and have a variety of options to choose from.

What is considered a “bad” credit score?

At the lower end of the scale are the categories “fair” and “low”.

credit score range





300 to 499

510 to 621

550 to 624


0 to 299

0 to 509

0 to 549

When you have a “bad” credit score, you are seen as a greater risk to potential lenders. This is why as a general rule, the lower your credit score, the higher the interest rate you will be charged and vice versa. Your “risk” is reflected in your interest charges.

For a low credit score, you may have had trouble managing your financial obligations in the past. You may have missed a few payments, defaulted on a loan or two, or even been declared bankrupt at some point in the past seven years. As a result, you will likely be very limited in your borrowing options – you only have a selection of lenders to choose from – and you will likely need to pay a higher interest rate.

All lenders are required to abide by responsible lending obligations, which include ensuring that the credit product is suitable for the borrower. Depending on the severity of your financial situation, you may have trouble getting financing at all.

Can you improve your credit score?

Fear not – even if you’ve had some problems managing credit in the past, credit scores can certainly be improved with time, consistency, and effort.

Your credit score is simply made up of the information on your credit report. With the high prevalence of CCR, more and more lenders are reporting positive credit behavior. This should facilitate the improvement of your credit score through good management of your credit.

Here are some tips for improving your credit score that you may want to consider:

  • Check your credit report for any errors or inaccuracies

  • Pay off outstanding debts on time

  • Pay other bills – like utilities or internet – on time

  • Reduce new credit requests

  • Lower your credit card limits/limits

  • Ask for help if you are struggling

Although there is no easy solution to getting a low credit score, demonstrating positive borrowing behavior should be reflected in your score over time. Improving your credit score is a bit like losing weight; It takes time, dedication, and maintaining good habits – and you may not see results for a while. But this is possible and has already been done.

Why is it important to understand how your credit score works?

Understanding your credit score can be helpful so you know how to improve and/or maintain it. When you want to borrow money – from a bank or other financial institution – your credit rating may be one of the most important points you will ever get. Forget the bad English score you got in high school – your credit score really matters in the real world.

When it comes time to buy your dream home, you don’t want to be held back by the silly financial mistakes of your past. As mentioned, some information will remain on your credit report for up to seven years. So even if it doesn’t seem so important right now, keeping your credit score in check is probably on your to-do list if you have plans to borrow in the future.

If you take nothing else from this article, the gist of it is: Don’t bite off more than you can chew. Get a loan or credit card only when you need it and can realistically pay it off. And if you are struggling and need help – reach out to the lender or utility provider. They may be able to help you arrange a financial hardship or flexible payment plan.

Image source: PabitraKaity on Unsplash

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