No doubt, at some point in your life you would have heard the terms ‘credit score’ or ‘credit report’ – and unfortunately you most often hear about these things at the precise moment you find out your score or report is a “bad” one. Not helpful!
Well, here’s a new reason you may hear those terms: the government is mandating some changes to the way credit is scored and reported on. And it’s a good thing for you (providing you pay your bills on time)! Comprehensive Credit Reporting will bring about some new, more positive, data points in credit reports which means that you’ll have more control over your score.
Here’s a brush up on what a credit score is, what’s in your credit report, what’s changing, and how you can make sure your credit score is good, not bad!
What is a Credit Score?
A credit score is a number which indicates to the banks how credit worthy you are (that is, how likely you are to repay the loan). A low credit score means that you are regarded as high risk, and can therefore be more likely to result in your loan application getting declined.
Who decides my Credit Score?
There are three main reporting agencies in Australia:
- Dun and Bradstreet (www.checkyourcredit.com.au)
- Experian Australia Credit Services (www.experian.com.au)
- Equifax (www.equifax.com.au)
If you’d like to know your credit score, you are entitled to obtain one free copy of your credit report per year from each of these agencies. You can also receive a free credit report if a loan application was declined in the last three months.
What is included in the report?
Traditionally, reports have included:
• Your name, gender, date of birth
• Your current and two previous addresses
• Your current (or last known) employer
• Your drivers licence number
• Any defaults or bankruptcies
• Business names held
• Details of enquiries on your credit file (provider, service applied for, amount)
• Listing of all accounts you currently hold (car loans, credit cards, mortgages, utilities ant telco)
• Overdue bills more than 60 days or more than $150
As a result of the coming government changes, there will also be some new, more positive, categories in the report including:
• Repayment history for credit accounts such as credit cards, home loans and personal loans
• Whether you have made a payment or minimum payment required
• Whether the repayment was made on time or not
• Any credit accounts you have, and the date they were opened/closed
• The name of the credit provider
• The current limit on the credit account
People demonstrating good credit behaviour (like repaying their debts on time) will soon see it reflected on their credit score and report. That means, more control over your score, the potential to recover faster from a bad credit situation, and the ability to establish a credit history more quickly.
In theory, it should lead to better access to credit and, hopefully, at better rates!
NAB have already started reporting, with other banks to follow this year.
How is my score decided?
Each rating agency will have their own formula but here is a rough guide.
Things that can have a positive impact on your score:
- How long you have had a credit file – the longer, the better
- Positive repayment history and lack of adverse reports is a good thing
- Time between loan applications – the less often you apply for a loan, the better
Things that can have a negative impact on your score:
- Multiple loan applications in a short space of time (e.g. shopping for a credit card).
- How often and how recently you applied for a loan
- Defaults and bankruptcy
- Overdue bills
How do I protect or Improve my Credit Score?
If your file and score aren’t great there are a few things you can do:
- Try to pay your debts and bills on time as often as possible, if not all the time. Setting up direct debits where you can, will help. And remember, things you might not suspect, like your phone bill, also count towards your credit score.
- If you are having trouble paying your loans or bills don’t wait until it is too late! Contact your bank or service provider and arrange an alternative payment plan until you get back on your feet.
- Check your file every year for anything that is incorrect and get it fixed (you will need to contact the credit agency to do this)
- Don’t apply for credit that you don’t need (like multiple credit cards!) and generally try to apply for credit with reputable lenders (i.e. avoid payday lenders)
- If you have any defaults then make sure that they are paid as soon as possible and make sure that the payment is recorded on your credit report
- If you have a poor history but are on top of your finances now, you can contact a broker to help you find a bank that doesn’t use credit scores