Credit Score Explained
A Credit Score is the easiest way for you or a Credit Provider to see the state of your Credit File without actually having to look at one, and acts almost like a kind of shortcut for Credit Providers to help them determine your creditworthiness. Companies like banks, payday lenders and credit unions will often use a credit score to help the decision whether or not they’re willing to lend you their money and, at times, can even influence the interest rate they give you.
How is your credit score calculated?
They then use this information, comparing it against other credit files, to dictate what your credit score is. Things like:
- Defaults (any unpaid debts that have been marked on your file)
- Employment history
- Enquiries (Made whenever a Credit Provider checks your file when you apply for a loan/credit card)
- Where you’re currently living and where you lived in the past
What does my Credit Score rating mean?
Your Credit score will be a number between zero and 1,200 or zero and 1,000.
It should be noted that you’re Credit Score from Credit Provider to Credit Provider, as Credit Providers have different ways of judging your Credit Score and sometimes even have different information on their copy of your credit file. Your Credit Score can also change day to day as you, and other Aussies, go about your lives.
To simplify it, your credit score can be looked at in one of five ways; excellent, very good, good, average and below average. The position of your credit score on this scale helps Credit Providers decide on whether or not you are a high or low-risk customer:
- Excellent (833-1200) – This means your credit file is either close to being or is pristine. It is next to impossible for you to be denied finance when applying for a loan or a credit card
- Very good (622-725) – You’re reasonably unlikely to be denied finance at this point, with a reasonably impressive score to boot.
- Good – While you may have a few Enquiries on your Credit File, you’re still in the clear. It unlikely you’ll be denied for finance, but, it’s still not the best idea to go crazy with applications; too much shopping around can drag your score down
- Average – You might have a few enquiries on your file, maybe even a default, but this is still your average Credit Score. If you keep applying for loans and cards, however, this won’t be your score for long.
- Below average – Your Credit File has quite a few Enquiries and maybe even a few defaults, you also might have some credit liability information or Bankruptcy Information
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Credit Score Rules Your Life
A sub-par assessment of your credit score can really disable your capacity for financial success. A poor credit score illuminates loan specialists and other credit suppliers to the possibility of you being a higher hazard, and won’t risk business with you, or will take you through unusually strict application processes and offer only higher interest rates. It’s vital to note, however, that there are several credit reporting bodies who each record their own credit score, with their own particular scale and philosophy. The primary entities to consider are Equifax with respect to individual funds, and Dunn and Bradstreet for more business-situated financing.
This means that the real numeric estimation of your credit score will be unique, dependent on the credit reporting body that informs this score. You might be surprised to find out that, as your credit score is contrasted against all other Australians, it will raise and lower on a daily basis. That said, the substance of the number means the same no matter how you look at it – it determines how creditworthy you appear. The motivation behind this is for the benefit of credit suppliers (for the most part; utility and telecommunications), to reduce the potential of taking on the clientele that will cost them money.
Why is your Credit Score so important?
It’s not really something you worry about, or are even told to worry about, until you’re well into your twenties. No teacher has ever sat down a 15 year old and tried to explain to them the importance of maintaining a decent Credit Score, what changes that score, and what a massive effect a Credit Score can have on one’s life.
Maybe that’s why we find ourselves in a situation where some two million Aussies are unable to buy a house or take out a loan for a car or a business. It can be really scary, being in your thirties or forties, having a lot of uncertainty around your financial stability. What if everything comes crumbling down? How will I rebuild?
Even when you’re young and have had less time to drive your Credit Score into the ground, it can have huge implications for the future – your ability to afford reliable transport, or a home for your family. The first things you’ll want to know are; what exactly is your Credit Score, and what are the effects it can have on your finances. Let’s jump into it.