A credit score is a fundamental indicator of a person’s financial health. Whether you’re applying for a loan, a mortgage, or even a mobile phone plan, your credit score plays a key role in determining your financial reliability.

A good credit score can make a big difference in your financial opportunities. It can determine the interest rates you’re offered, the amount of credit you can borrow, and even the kinds of products and services you can access, such as insurance or utilities. Lenders are more likely to approve your applications and offer favourable terms if your credit score shows that you’re a low-risk borrower.

In this article, we outline what a credit score is, what the scales are for the scores, and what you can do to maintain or improve it.

What is a credit score?

A credit score is based on your credit history and gives a numerical representation of your creditworthiness. It helps lenders assess the risk of lending money or approving credit. The score typically ranges from 0 to 1,200, with a higher score indicating better creditworthiness.

There are three major Australian credit reporting agencies that calculate credit scores:

  1. Equifax
  2. Experian
  3. Illion

Each agency uses different algorithms and data sources, which gives different scores within different ranges. The factors used to calculate a person’s credit score are:

  • Payment history. Paying bills, loans, and credit cards on time demonstrates to lenders you’re reliable.
  • Credit applications. Frequently applying for credit may lower your score as it can suggest financial distress or an over reliance on credit. Enquiries you make for credit, including loans and buy-now-pay-later (BNPL) facilities, stay on credit reports for five years, but have less of an effect over time.
  • Credit source. A balanced mix of different types of credit (like a mortgage, credit card, and personal loan) can have a positive impact on your score as it can suggest you're able to manage debt.
  • Credit history length. Having a longer history of responsible credit usage can boost your score.
  • Non-payment events. Any missed payments, payment defaults, court judgments, debt agreements, personal insolvency agreements, and bankruptcies can significantly decrease your score.

How are credit scores rated?

Credit scores generally follow this scale:

  • Excellent (800–1,200). You’re in the top tier of creditworthiness and could be offered favourable interest rates and terms.
  • Very good (700–799). You have a strong credit history and should readily secure credit.
  • Good (625–699). Lenders consider you a safe borrower, but you may not be offered the most competitive interest rates.
  • Average (550–624). You may face higher interest rates or less favourable terms.
  • Below average (0–549). Indicates a high level of risk for lenders, and you may struggle to obtain credit.

Comprehensive Credit Reporting (CCR)

In 2018, the Comprehensive Credit Reporting (CCR) system introduced more detailed and balanced credit reporting to assist lenders to comprehensively assess credit applications and make informed decisions. Under the CCR, both positive and negative credit behaviours are reported to credit agencies, whereas previously only negative credit behaviours were captured and considered. This system gives lenders a fuller picture of a credit history, which means responsible borrowers can be rewarded with improved credit scores over time.

How to maintain and improve your credit score

To maintain and improve your credit score consider the following strategies:

  1. Pay your bills on time. Late payments can stay on your credit report for up to five years. However, payment extensions given before an account’s due date are generally not reported and payment extensions given after the due date may be reported to credit bureaus for inclusion on a credit report.
  2. Reduce your credit card debt. Pay off your balances regularly to lower your credit use.
  3. Limit new credit applications. When you apply for credit—whether you proceed with the application or not—an inquiry is added to your credit report. Too many inquiries, particularly in a short period i.e. within six months, can lower your score.
  4. Consolidate your debt. Consolidating multiple debts into a single loan can make repayments more manageable and improve your credit profile.
  5. Be aware that business tax debts can be reported. The Australian Taxation Office (ATO) can disclose debt information to credit bureaus under certain conditions and when certain business tax debts reach $100,000 that are at least 90 days overdue. Click here to read more.
  6. Review your credit report. Errors on your credit report e.g. an incorrect listing of late payments, can negatively affect your score. Ensure your information is accurate by signing up to a free platform like ClearScore. Also, a name change creates two credit reports and you can request to have these merged. Note, any personal enquiries you make to check your credit report has no impact on your credit score.
  7. Protect your credit report from identity theft. If you’re concerned about identity theft/data breaches or a potential fraud, request a temporary ‘ban’ on your credit report.

Importantly, you must be aware of how much credit you have available to use as this impacts your borrowing capacity when considering or applying for a loan. However, you also don’t want to prematurely close off lines of credit, whether it’s a credit card or a buy-now-pay-later credit facility, if it only means you’ll apply for a new one to manage your finances. As explained above, this creates a new credit enquiry to be recorded on your credit report.