Your credit score and credit report – what they are and why they matter

In the world of personal finance, there are a lot of important numbers – interest rates and loan terms, your credit card balance and your monthly expenses. But what about your credit score? 

Your credit score is one of the most important numbers you should know because it can affect, or be affected by, almost every other number you deal with.

A credit score is a 3- to 4-digit number that has the power to influence your ability to be approved for a credit card, personal or home loan or other credit product.

Also known as a credit rating, a credit score can be found on your credit report provided by a credit reporting body. So, what are they, what affects them and why do they matter?

Plus, how do you maintain or improve your credit score?

Keep reading to find out.

What is a credit score?

A credit score or credit rating, is a number calculated by a credit reporting body that tells lenders how trustworthy of a borrower you’re likely to be. Just like you look for 4- or 5-star reviews for a restaurant you‘re thinking of trying, a lender wants to know what your ‘star rating’ is. Depending on the agency, your credit score will be a number from 0—1,200.

There are three credit reporting bodies in Australia: Experian, Equifax and illion. The lender you are applying for a credit product with, such as a credit card or home loan, may use one or all of these agencies when they do a credit check with your permission. 

You can see the factors that go into calculating your credit score by reviewing your credit report. Each agency will have its own method for calculating your score based on what’s in the report.

What is a credit report?

A credit report is a record of your credit history. The information contained in your credit report is used to calculate your credit score. There are many factors that contribute to your credit score including negative and positive information. This can range from checks made to your credit by a lender, current and past credit accounts, the amount and type of credit accounts you currently have open, late credit card or other credit repayments, and payments you make on time.

Why your credit score matters?

Your credit score is a snapshot of your credit health at a given point in time. The higher your credit score is, the more likely you are to be approved the next time you apply for a credit card or loan. 

A higher credit score may also positively influence the interest rate and loan term you’re offered, potentially saving you money over the life of the loan.

Checking your credit score and credit report

You should check your credit score and credit report at least once a year even if you aren’t planning on opening a new credit card or applying for a loan in the near future. By checking these regularly, you’ll always know where you stand and you can look for any irregularities that might need to be fixed. 

You can get a copy of your credit report from any of the three Australian reporting bodies. You are entitled to one free credit check per year, so it’s worth setting yourself an annual reminder. Since the three agencies report on slightly different variables, you might want to get a report from each to make sure you have all of the information available.

Checking your credit report doesn’t impact your score in anyway.

How to improve or maintain your credit score

Each reporting agency has its own criteria for what makes a good, average or poor credit score. Generally speaking, the higher your score, the better borrower you appear to be.

Since the introduction of Comprehensive Credit Reporting (CCR) positive and negative factors both influence your score. So paying your bills in full and on time can increase your score, while missing a credit card payment can reduce your score.

Here are some tips to improve or maintain your credit score:

• Only apply for credit products when you need them. 
• Regularly check your credit report to make sure the information is correct and work with the reporting agency or credit provider to remove or update any incorrect information.
• Pay your bills on time. This includes buy now, pay later providers.
• Only use credit you have available to you, such as a credit card, when you need to.
• Be mindful of the types of credit you have, your debt to credit ratio and how much available credit you have.

Knowing your credit score is an important step in responsibly managing your finances.

Understanding what’s on your credit report not only helps you be a savvier borrower, it can also help prevent identity theft or fraud. If something on your credit report doesn’t look right, contact the reporting body or lender to get it taken care of.

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