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A girl thinking and looking outside; image used for HSBC Australia Understanding your credit rating

Understanding your credit rating

Your credit rating, or 'credit score', is an important tool in understanding your credit worthiness. But many Australians don't know what lenders look at to calculate your credit rating.

Recent changes to how credit scores are determined may also mean that your score could have changed.

In the past, banks and other financial institutions had access to a limited amount of information to determine your ability to borrow money. But since the rollout of a new system in 2014 – called 'positive credit reporting' or 'comprehensive credit reporting' – companies now have a more complete and accurate picture of your financial health.

This could impact the amount of credit you can get - and importantly, the interest rate and other terms they might offer you.

What is a credit score?

A credit score is a measurement of your credit worthiness. It tells financial institutions how risky or how safe it would be to lend money to you. It's based on your financial history and your ability to repay debt.

Your credit score represents, in one number, all the information on your credit report. This includes information about you that is stored with banks, credit card companies, store cards, telecommunication providers and utility companies, as well as the public record.

Who determines your credit score?

There are three main companies that provide credit scores in Australia. The largest is Equifax (which also owns 'Veda'). The other two are Experian and Dun & Bradstreet.

Depending on the agency, your score will be a number between zero and 1,200 or zero and 1,000. The score sits on a five-point scale: excellent, very good, good, average and below average. The higher the score, the higher your credit-worthiness. 

How do they calculate a credit score?

All of the agencies calculate the scores in similar ways. An Equifax Score, for example, is broken down into the following components: credit applications (51 per cent), repayment history (30 per cent), credit limits (3 per cent), adverse events (10 per cent), personal information (3 per cent) and credit report age (3 per cent).

Your credit score is also dynamic. It varies from month to month as your financial circumstances change.

Lenders consider various factors when looking at your application, but the credit score plays a significant role in the final decision.

The average Australian has a healthy credit score

In 2016, the average Equifax Score for Australians was 757, which is considered a very good score.

The average score for millennials was a bit lower, at 712. That's partly because younger people haven't had as much time to establish their credit rating. Also, young people generally own fewer assets, so they're not able to offer collateral on loans, which makes them a higher risk.

Are you young or new to Australia?

Young adults who have never applied for credit, and people who are new to Australia, may not have a credit score.

Your credit file will be created when you first apply for credit or a loan. Your initial score will probably be a low score because you have no credit history.

Equifax offers some great tips to improve your credit rating over time. The most basic one is to make sure to always pay your bills on time. (And if you're struggling to do that, to talk to your creditor to see if you can work out an arrangement.)

Checking your credit rating may protect you from fraud

An important way of keeping control of your identity is keeping tabs on your credit score. Check your credit rating and credit report regularly to ensure all credit enquiries and listings are correct.

If any details are incorrect, out-of-date or incomplete, you will need to contact the credit provider or credit reporting agency to have them investigate this for you.

Where can I find information on my credit score?

ASIC's MoneySmart website contains further information on where you can find out your credit score for free, and ways to improve your credit score.