PART 1: A guide on understanding your credit report and your credit score
By Mike Laing, Chief Executive of the Australian Retail Credit Association
Credit scoring is like going to the doctor for a health check-up. They might check your blood pressure, heart rate, take a few tests and then provide you with a result.
Providers like banks, credit unions and finance companies might look at your credit score, but they will also look at whether you can afford to repay the loan by considering your current income and expenses, including existing loan repayments.
If the credit provider does not think that you can afford to pay the loan back, they will not approve you even if your credit score is high. So, focus on your credit report.
|Credit Report||Credit score|
What is a credit score and how is it calculated?
Each credit reporting body will use their own method to calculate the credit score that you can obtain through a credit score website (e.g., GetCreditScore, CreditSavvy etc). Each will use personal and financial information about you that is stored in your credit report to determine your credit score, but as each credit reporting body may hold different information – sometimes more or less – about you, each credit score site you access may give you a different score. It is important to remember that the score you receive from any scoring website or lender is only an indication of how that credit provider will view your credit health.
Your credit score depends on some things that you can control:
- Your current loans
- The lenders you have used
- Whether you paid back those debts on time
- Whether you defaulted on any bills or repayments, meaning you have not paid by the agreed date and/or to the agreed amount (time and dollar value limits apply)
- Whether you have had multiple applications for credit within a short period (you will see an enquiry section in your credit report) e.g., applying for lots of loans or credit cards, especially for high-risk credit, are negative indicators when viewed by a credit provider
- Whether you have been bankrupt, or had to negotiate an agreement to change how you repay a debt through legal channels
Importantly, your score does not just depend on what information the credit reporting body has about you, but also on how that body has interpreted this information. This means, two credit reporting bodies may have exactly the same information about you, but one may conclude that you are more likely to pay back your debt (i.e., have a higher score) and one body may interpret this information to mean that you are less likely to pay back your debt (i.e., have a lower score).
What does a good credit score look like?
There is not a single standardised credit score range in Australia. Equifax, which is a US based credit scoring agency, creates scores on a scale from 0 – 1200, whereas the other two credit reporting bodies Experian and Illion use a range of 0 – 1000.
Your credit score will change over time as your own credit behaviour changes e.g. if you apply for and/or take on more debt, or if your monthly repayment behaviour changes.
|In Australia, your Experian Score will be a number between 0 and 1000||In Australia, your Equifax Score will be a number between 0 and 1200||In Australia, your Illion Score will be a number between 0-1000|
|Below average (0-549)||Below average to average (0-509)||A low score: 1-299|
|Fair (550-624)||Average (510-621)||Room for improvement: 300-499|
|Good (625-699)||Good (622-725)||Good: 500-699|
|Very good (700-799)||Very good (726-832)
|Excellent (800-1000)||Excellent (833-1200)||Excellent: 800-1000|
How long is information retained on your credit report?
Identity information including your name, date of birth, gender, driver’s licence, and address history is held for the life of the credit report. For other information on your credit report, here are some of the typical timeframes:
- Repayment history information: Only banks, credit unions and other types of finance companies can report or access repayment history information. Phone, gas, and electricity providers are not able to report or access this information. If a payment is late, and beyond the 14 day ‘grace period’ where late payments are not recorded, this will become part of your record.
- Consumer credit liability information, including details of your credit provider, and the terms of your credit agreement (type of credit account, the credit limit). The information is displayed for 2 years from the end of the consumer credit agreement.
- Any credit enquiry
- Overdue accounts listed as a payment default. If you subsequently pay off the default, your credit report will be updated to show this – but the default will stay onthe report for the 5 years.
What are the thresholds for reporting default information?
A credit provider can report your non-payment to the credit reporting body or bodies where a payment over $150 is at least 60 days late. This default will stay on your credit report for the next five years.
How can you get access to your credit report and a credit score?
Everyone has the right to one free credit report per year from each credit reporting body. In Australia, there are 3 main credit reporting bodies – Equifax, Experian & Illion. Credit reports include comprehensive information that credit providers see when you apply for a loan, or other forms of credit, so it is important to check each report for any errors.
Each credit reporting body may deal with different credit providers so the information they provide may vary. To access your free credit report from each of the credit reporting bodies, visit the following websites:
To access your free credit score from each of the credit reporting bodies, visit the following websites:
The score that matters for your next credit application will depend on which credit reporting body the credit provider uses – or even if they use a credit score at all when assessing your application. But keeping an eye on your score from one or more of the websites can still be a great way to keep track of your credit health and how it is changing over time.
PART 2: What can you do if you believe something is wrong on your credit report?
If you find information in your credit report that you believe is incorrect, contact your credit provider or the credit reporting body and dispute the information on your credit report.
If you are not satisfied with their explanation, tell them why and request it is corrected. You can speak to any credit provider or credit reporting body who holds your credit information (not just the organisation responsible for the incorrect information) to ask them to investigate it for you.
You should also consider whether you have documents or other information to prove the information is not accurate. To help ensure that your dispute is dealt with quickly by a credit provider or credit reporting body, it is always a good idea to provide them with the documents or information upfront that shows an error has been made. Provide it as early as possible, as it may be critical to having the correction made.
If you feel as though you cannot deal with the correction request on your own, make an appointment with a community legal centre or a financial counsellor who can help you through the process. Community legal centres and financial counsellors provide free advice and assistance.
Be aware of companies offering credit repair, as these companies often charge high fees for services that you can do yourself, for free.
If the information on your credit report turns out to be accurate, speak to your credit provider about what it means and how it may impact you. Also consider what you can do to manage your credit effectively in the future.
The credit provider or credit reporting body must respond to you within 30 days – unless you agree to extend that period. Once the matter has been investigated, you must be provided with a written response indicating whether a correction will be made (and if not, why not).
If you’re still unhappy, you can ask the credit provider or credit reporting body’s External Dispute Resolution (‘EDR’) service to look into it; these are independent bodies who look into complaints. There are different EDR service’s that investigate different complaints. If your complaint is directed to the incorrect service, they will refer you elsewhere. You can also contact the EDR service if you have not received an answer to your complaint within 30 days.
Finally, if you are not satisfied, you can complain to the Office of the Australian Information Commissioner – the independent government agency that is responsible for looking after credit reporting.
PART 3 – The impact of financial hardship on your credit report
You can find yourself in financial hardship when something happens to you that impacts your ability to make your loan repayments on time or puts you in a position of having to choose between making your loan repayments and being able to afford other important expenses (e.g., food, housing, electricity etc). Natural disasters are a good example of when this might happen, but other circumstances such as illness, job loss, or relationship breakdown might also lead to financial hardship being experienced.
If you are experiencing financial hardship and making repayments on loans is or will be a struggle, then, as soon as you are able, it’s wise to contact your credit provider and talk to them about your situation.
Lenders understand circumstances change and people struggle from time to time, and they can provide help. In fact, if you ask for help the law requires them to assess you for a ‘hardship variation’. Lenders also understand that everyone’s circumstances are different, so different types of help may be available e.g., the credit provider may agree to change your payment terms to give you more time to pay, or to reduce your regular repayments for a period.
Talking to your lender also makes sense because if you don’t and financial hardship means you stop making your repayments on time (or start paying less than the minimum repayment), that will start showing up in your credit report. That’s because under normal circumstances, missed loan repayments are recorded in consumers’ credit report as part of the 24-month record of repayment history information. Each month you miss a payment, the repayment history information will worsen.
If you do receive hardship assistance from your lender, how that assistance is reflected in your credit report will currently depend on the type of assistance and the lenders policy. However, most lenders who have been offering COVID-19 payment pauses or deferral to people needing assistance aren’t reporting those as missed payments. Most just simply stopped reporting repayment history during the period of assistance, while some reported repayment history information as being “up to date”.
It is important to note however, that no lender can report the specific reasons for you being in hardship on your credit report.
Because there is no standard approach as to how lenders report people receiving hardship assistance, the law has been changed, and so from 1 July 2022 a standard approach will come into effect. The changes will mean:
- The repayment history information on your credit report will reflect what was agreed under the financial hardship arrangement. For example, if the lender agrees for you to temporarily make half your normal repayments, your credit report will show that the payment has been made if you meet that agreement.
- The credit report will also put a ‘flag’ alongside your repayment history information that means that the repayment history is associated with a special arrangement – in the credit report this will be referred to as ‘financial hardship information’.
So now and into the future, if you are struggling it is better to talk to your lender and see what assistance can be provided, and doing so will reduce the chance of having missed repayments recorded on your credit report.
Receiving hardship assistance also doesn’t have to impact whether you can access credit in the future. If you were to apply for a new loan with a different lender, what’s in your credit report is only the start of the conversation. Lenders would obviously want to know if you had received assistance due to hardship. But before agreeing to lend, lenders will take your whole situation into consideration – not just whether you needed help with repayments because of hardship, but also things like what your income and expenses will be going forward.
Who is CreditSmart?
CreditSmart is an information website (www.creditsmart.org.au) created and supported by credit experts to help consumers understand how credit reporting operates in Australia. It aims to help consumers take control of their credit health and understand how recent credit reporting reforms affect them, by providing information about the system that is unbiased and fair. The CreditSmart website is owned by the Australian Retail Credit Association (ARCA), which is the peak body for organisations involved in the disclosure, exchange, and use of credit reporting data in Australia.
Further reading on what can impact your credit score, you can check out, the following articles: does applying for a credit card hurt my credit score and does pausing payments affect your credit score?
Mike is chief executive of the Australian Retail Credit Association since July 2017 and was the ARCA Board Chair from September 2012 – March 2019.
He is an experienced Director and senior executive with experience across Australia, New Zealand, the United Kingdom, and Ireland. Mike holds a Master of Commerce (Hons I), is a graduate member of the Australian Institute of Company Directors, and a member of the Chartered Institute of Arbitrators.