Financial Education Series

What affects your credit score?

Before diving into ’what affects your credit score’, let’s start off with the most frequently asked question…what is a credit score?

A credit score is a number that represents your creditworthiness. According to Finder, 73% of Australians don’t know their credit score or why they are important. 

If you’re applying for a loan, the lender will look at your credit score to help them assess the likelihood of you being able to pay back the loan. The higher your score, the better you look to potential lenders.You might be wondering, what’s the difference between a credit score and a credit report. Your credit score is a number between 0 – 1,200 and is based on your credit history including how much debt you have, repayment history, credit enquiries etc.).

Your credit report includes detailed information regarding your credit history which is basically anything that affects your credit score.

1. Payment history

Your payment history makes up around 35% of your credit score and is one of the most important factor in your credit score. A lender can get a pretty good idea how you manage your money simply by looking at your payment history. A missed or late payment on your personal loan, mortgage, credit card or utility bill can harm your credit score. For late payments, it could take up to 30 days to be reported to the credit reporting agencies. And usually stays on your credit report for seven years.

2. Debt level

While assessing how your debt levels impact your credit score, you need to keep in mind two things:

• Credit utilisation ratio

This is a percentage of how much available credit you have and what is currently being utilised. Credit reporting agencies use this to calculate a your credit score. Lowering your credit utilisation ratio can help you to improve your credit score. You can achieve this by paying off loans early. 

On the flip side, maxing out your credit cards and going over the limit will surely damage your credit rating.

• Debt-to-income ratio

It’s quite self-explanatory – it’s a measure that compares the amount of debt you have to your overall income. It’s another factor banks and lenders take into account when considering whether to offer you a loan. So it makes sense to only apply for an amount that you need and can pay back. A decline in a loan application can have a negative impact on your credit score.

3. Credit history age

The longer your credit history, the better it is for your credit score. Simply because customers with a short credit history haven’t yet shown that they can make payments  in the long run. Having an established credit history is a good way to improve your credit score.

4. Number of hard enquiries on the report

A hard enquiry happens when you apply for certain new credit and the lender requests to review your credit report before approving you. This can have a small, temporary negative effect on your score. So, it’s better to avoid hard enquiries where you think your application might be declined. A long list of loan application declines doesn’t look too good on a credit report. 

Hard enquiries differ from soft enquiries. A soft enquiry is used to get a high-level idea of your financial status and they don’t affect your credit rating.

5. Types and number of credit applications 

How often and how much you apply for credit will affect your credit score. When applying for a personal loan, car loan, mortgage and credit card, the lender will make a hard enquiry on your credit file. The more often you apply, this tells lenders that you’re desperate. Remember to only apply when you need it. 

No matter how your credit score is currently tracking, remember – it can always change for the better! Read our tips on how to improve your rating here.