Why You Need a Good Credit Score Australia?
Did you hear about the switch to “Comprehensive Credit Reporting” in Australia? Are you wondering why you need a credit score anyway?
Credit reports are how lending institutions assess your reliability to pay back debt. Each time you apply for credit, the bank or credit company will use a credit report to assess your risk of default.
If you have utility bills, a mobile phone plan or any other borrowing history, you will have a credit report available. It is not impossible to get a loan without a credit history, but it may be harder.
Buying a home or investment property in the next couple of years is the most significant reason to need a good credit score. Approval for other credit will require a reasonable credit rating. A very good or excellent credit score when you apply for a mortgage may increase the amount borrowable and lower the interest charged.
Since 2017, comprehensive credit reporting occurs in Australia. Under the previous system, only negative events were recorded, such as failing to pay your phone bill or declaring bankruptcy. Under the comprehensive system, your positive repayment history is also recorded. It is probably a fairer system that gives people a chance to prove their credit worthiness after a mistake.
What is the Difference Between Credit Score and Credit Report?
A credit report is a detailed document describing your credit behaviour. Anyone is able to obtain a free copy of their credit report at Experian annually. You shouldn’t ever need to pay for a credit score or report.
A credit score is a simple summary of all this information as a single score. This score is between 0 and 1000 or 1200, depending on the credit agency, and represents how likely you are to repay a future debt. You are able to check and monitor your credit score monthly. This is important to monitor for mistakes on your file, and effects of credit card applications (especially for travel hackers). If your score is average or worse, it is worth obtaining a free copy of your credit report.
What is a Good Credit Score Australia?
There are three main credit agencies in Australia. They do not publish the actual formula used to calculate credit scores. They likely all use the same factors, with slightly different weighting. Banks and lending institutions may use one or more of the agencies to assess your credit worthiness.
Depending on the agency, the credit score is a digit score between 0 and 1000 or 0 and 1200. Scores in the “Very Good” or “Excellent” range for each agency will get you access to the cheapest credit available for your income and debt level.
800 – 1,000
700 – 799
625 – 699
550 – 624
0 – 549
What Factors Contribute to a Good Credit Score Australia?
The number of credit accounts, types of credit and amount borrowed all factor in your credit score. Credit agencies tend to see mortgage and student loan debt as responsible debt, meaning they may actually improve your rating. Multiple credit cards and personal loans, at some unclear point will start to have a negative impact on your score.
A consistent history of paying off debt over a long period of time gradually increases your score over time – meaning older people on average have better credit scores.
A repayment late by 14 days or more can have a negative effect on your score, and remains on your record for up to 2 years.
Frequent credit enquiries can reduce your credit score. It is worth avoiding credit applications if possible when planning to take on a mortgage in the next few months.
Whilst saving for the deposit for my first investment property last year, I avoided applying for any credit despite a pretty bad case of travel hacking obsession.
After securing the mortgage, I couldn’t resist a credit card with a great sign on bonus, only a month after house purchase.
My credit score dropped by 85 points! It is likely the effect on credit scores is variable, but it took three months of good behaviour to return the score to it’s prior peak.
Not significant given I did not plan on borrowing for further mortgages in the near future. But I’m glad I waited!
Credit enquiries stay on file for 5 years. The total number of enquiries on file can have a negative effect on your rating for a long period of time. Another caution around travel hacking if you hope to secure a mortgage within the next 5 years.
A default is counted as repayment delayed by at least 60 days, and can stay on your record for 5-7 years. Definitely something to be avoided.
Any history of declaring bankruptcy obviously has a very negative effect on your credit rating.
COVID-19 Mortgage Deferrals
As long as a deferral has been agreed with your bank, rather than you just stopping paying without communicating, the deferral will have no effect on your credit score.
How Responsible People Can Get a Bad Credit Score
Obviously, you should pay your debts, borrow no more than you can afford to always repay on time. If you follow these basic rules, is there any reason to bother checking your credit score?
Identity theft can occur, when a fraudster gets hold of some of your personal details and applies for credit in your name. The sooner you are aware of this, the sooner you can correct the record and minimise complications.
Travel hackers keen on credit card sign up bonuses should definitely monitor their score, pace credit card applications a few months apart and avoid them in the lead up to buying property. They should also be aware of the total number of credit enquiries on their file.
Moving house and failing to notify all the companies you owe money is the commonest way otherwise responsible people seriously damage their credit rating. If a utility or telecommunications company are unable to contact you for 6 months, a default is recorded. This can remain on your record for 5-7 years. It is vital you give these companies more than one way to contact you, and ensure all bills are paid after you leave a property. Don’t rely on your dodge flat mate! It may come back to haunt you.
How to Improve to an Excellent or Good Credit Score Australia
- Check your credit score
- Request your credit report and correct any mistakes.
- Pay off any personal loans, and the balance of credit card accounts
- Keep your oldest credit card open, as the long credit history can have a positive effect on your score. Close un-needed credit cards
- Reduce your credit limit as this has a significant effect on your borrowing power.
- Use your credit card every month, but keep the balance used low and pay the full balance off every month without fail.
- Set your utilities, phone bills, rent, credit card and any other regular expenses to direct debits to avoid late repayments
- Avoid credit enquiries while trying to improve your score and when you could pay cash instead.
- When you need to apply for credit, check your credit score before applying. A credit enquiry will be recorded whether or not you are approved, and you don’t want excess credit enquiries on your file.
It is prudent to monitor your credit score to watch for fraudulent activity and ensure reasonable borrowing ability in case it is needed. In the 1-2 years before mortgage application it is worth limiting credit enquiries and ensuring your credit score is in the very good or excellent range.