Your credit score is one of the most important financial indicators in your life, and a crucial factor to consider when applying for a loan.
Lenders take this into account when deciding to approve or deny a loan, but your credit score determines much more than that, including whether you’re getting the best deal on offer.
Money Matchmaker® explains how to understand your credit score, what it means when applying for finance, and the simple ways you can improve your score to get a better deal when applying for a loan, all for free.
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What is a credit score?
Your credit score is a number that represents your reputation or quality as a borrower - the higher the score the better - and is reflective of positive and negative credit actions in your credit report.
Your credit report is a history of borrowing and other personal and financial information kept by credit reporting agencies. You can view your credit score without requesting a credit report.
Why is a good credit score important?
Your credit score is important because it represents your financial history.
This means lenders use your credit score to profile you as a borrower and help decide whether to lend you money and what to charge if they do.
Lenders use this score as part of their assessment to determine:
- If you’ll be approved for a loan
- How much money they’ll lend you
- If you can afford the loan repayments
- What interest rate you qualify for.
Risk-based assessments are a simple way to understand how your credit score and all other information you provide to a lender work together.
The more evidence you can provide to a lender that you are trustworthy in borrowing the money and capable of repaying it in full, the more likely you are to get approved for a loan, and the more likely you are to receive a better rate.
What sort of finance does a good credit score get you
A good credit score doesn’t just give you access to finance, it gives you access to better finance - better loans, better borrowing limits, better rates, and an overall better experience when applying for finance.
A good credit score can also help others. For example, in the future, one of your children may require you to act as a guarantor on their own loan application, and your good credit score may be the help they need to gain approval.
Does a good credit score only affect how much I pay on a loan?
It could be simple to just think that the benefits of a good credit score are just paying a little less.
But what does a better credit score really give you? A better life.
Think about it this way: a better deal means you pay less, which can mean getting out of debt sooner and making fewer applications over your lifetime.
Debt (and bad credit) is an unfortunate cycle that many choose not to break out of without even realising it, and it’s always easier to break this cycle if the conditions surrounding it are favourable.
The less dependent you are on finance, the less likely you are to rush into a decision, and the better you’ll look in the eyes of a lender - as a responsible borrower who considers their financial decisions carefully before applying.
How do I know if I have a good credit score?
A good credit score is one that doesn’t negatively impact your ability to access finance.
As your credit score is just one factor considered by lenders in a loan application, there are other ways to improve or strengthen your application, such as by providing a deposit, collateral, or guarantor.
In fact, not all credit agencies have the same rating system for credit scores, as seen in the table below.
| Credit score | Experian | Equifax | Credit Simple |
|---|---|---|---|
Excellent | 800-1000 | 833-1,200 | 800-1000 |
Very good | 700-799 | 726-832 | 700-799 |
Average | 500-699 | 622-755 | 625-699 |
Fair | 300-499 | 510-621 | 550-624 |
Low | 0-299 | 0-509 | 0-549 |
If this seems a bit confusing, don’t be alarmed. Although the numbers for each credit score rating may differ, it’s still fairly simple to break them down into three basic categories:
- Excellent credit scores are 800+ and will give you the greatest freedom in accessing loans and finding the best deals available.
- Good credit scores are between 600-800 and will allow you to access most forms of finance without heavy restrictions, although to get the best rates you may need to find other ways to strengthen your application.
- Bad credit scores are between 0 and 500. If you’re in this range, you can still access some types of finance, but unless there’s absolutely no other choice, you’ll be better off looking at ways to improve your credit score first before applying for finance.
You might be thinking ‘is a 500-600 credit rating good or bad?’ and this will largely depend on which way you're moving in your credit rating.
If you’re in this range due to recent mistakes, then you’ll be better off waiting to improve your score. However, if you’ve been making your way back up toward a better credit score, this will be a more positive indication that you are trustworthy.
The reason lenders look at your recent financial behaviour is partly due to the introduction of Comprehensive Credit Reporting (CCR).
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CHECK SCORECCR and how to tell if you have a good or bad credit rating
CCR is a new credit reporting system that was introduced in 2018, and the introduction of CCR makes improving your credit score far easier than you might think.
The updated system shows positive credit actions as well as negative ones - lenders can see if you’ve been making repayments on time or settling debts - and this helps illustrate the good/bad grey area of the 500-600 credit score as it indicates how you are currently approaching your finances.
What’s more, CCR gives borrowers more power over their credit scores requiring that lenders and credit reporting agencies:
- Take steps to help you fix incorrect information in your credit report.
- Respond to complaints promptly.
- Do not misuse the information in your credit report.
Each of the items listed above will have either a negative or positive effect on your credit score. Here’s an example of how certain actions could affect yours:
| Increase your credit score | Decrease your credit score |
|---|---|
Paying off debt loans and credit cards. | Bankruptcies that were within the last five years and/or bankruptcies that ended within the last two years |
Having a credit limit higher than your credit balance | Court writs against you for financial matters |
Paying your bills on time | Paying bills over $150 late by 60 days or more (e.g. power or internet bills) |
Consistently making debt repayments on time over a long period of time | Applying for credit cards, loans and other forms of finance too frequently. |
Late payments and/or defaults |
Is my credit score affected when applying for a loan?
At a certain point during the loan application process, a lender will need to conduct a credit check.
There are two types of credit checks:
- Hard credit checks are made when you make an official loan application. Hard credit checks are recorded in your credit history.
- Soft credit checks are less formal, such as when you’re simply checking your credit score. These are not recorded in your credit history.
It’s important to distinguish between the two, for one very important reason: hard credit checks can affect your credit score.
Here’s an example:
Let’s say you want to apply for a loan, but you’re not sure if you’ll get approved because in the past you’ve only applied for a credit card. This is your first big loan application, so you decide to just apply with a few lenders to see who can give you the best deal.
To you, this looks like you’re just asking around to see what’s best for you.
On your credit report, this looks like someone desperately applying for finance with everyone they can. It might signal to a lender that you’ve been rejected by other lenders and are trying to find one who will lend to you.
Avoid hard credit checks where possible - and unless you are confident you can get approved.
How to get a better credit score and better loans
If you have a low credit score, there are ways to improve it over time. Some of these may be instant (such as correcting mistakes on your credit report) while some of these may require you to wait a specific amount of time to clear an event from your report.
Here’s what you can do:
- Find out your credit score and view your credit report
- Check for any incorrect items
- Stop applying for credit
- Make regular repayments over time
- Pay off any defaults
- Wait for negative events to be removed
You can check your credit score and credit report for free online by visiting the websites of credit reporting agencies.
Your credit report will include personal and financial information, including the credit you have, any credit applications you’ve made and details of bankruptcies or court judgements.
When are negative events removed from my credit report?
Depending on the type of credit event (and its severity), you can expect to wait anywhere between two and five years before negative events are removed from your credit report.
Here’s a basic summary of how long each major negative event takes to be scrubbed from your file.
- Late payments are removed after two years.
- Payment defaults are removed from your credit report after five years.
- Bankruptcies are removed from your credit report either two years from the date your bankruptcy finishes or five years after it begins - whichever is longer.
- Debt agreements are removed after five years in most cases.
- Court judgements are removed after five years.
- Credit enquiries are removed after five years.
The short answer here is: if you’re thinking about applying for major finance such as a home loan, you might consider just waiting a few years to let your credit score improve.
Of course, you could always choose to refinance later down the line, but keep in mind that you’ll need to be approved, and make consistent repayments to improve your score on your mortgage until then (as a declined application or late payments will only add new events to your file that you’ll need to wait out).
A key to a good credit score is to monitor what is going on and report any problems when you see them. You can do this with the help of Money Matchmaker® for free.
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About the Author
Shaun
McGowan
Shaun McGowan
Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.
