PART 1: Understanding your credit report and your credit score – the basics

The article is part 1 of a 3 part series that looks at credit reports and credit scoring.

 

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
  • A credit report is a detailed record of your credit information
  • A credit report has detailed information about your credit accounts including your repayment history
  • Your credit report measures your credit health. It has details of your loans and whether your payments are up to date.
  • When you apply for credit or a loan, a lender may look at your credit report to understand your debt commitments and gain insights into your credit health.

 

  • A credit score is just a number, calculated by the credit reporting bodies, which is largely based on the information in your credit report
  • A credit score is a high-level indication of your credit health, based on the credit reporting bodies interpretation of the information in your credit report
  • Your credit score is a summary of your credit report in one number.
  •  It usually goes from 1 – 1000 or 1-1200, and it is derived from the information on your credit report at one point in time
  • It is like your pulse – just an indicator of your overall physical health. Your pulse goes up and down depending on what you are doing – and so will your credit scores.

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.

EXPERIAN EQUIFAX ILLION
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)

 

Great: 700-799
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:

Two years

  • 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.

Five years

  • 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:

Australia’s three main credit reporting bodies work with a number of businesses that provide online credit scores. By going to each of these websites and filling in the required data, they’ll show you your credit score based on your credit report from the credit reporting body they’re affiliated with. The websites below give you access to your credit score for free but there are strings attached use your information to market products and services. If you are worried about how they will use your information, make sure you have a close read of the website’s privacy policy (which should also tell you how to opt-out of getting the marketing material if you do not want it).

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.

 

 

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.