What the finance is a credit score?
Personal finance can feel about as straightforward as Beyoncé’s hair on a humid day. Less than 30% of Australians have actually checked their credit score from a credit reporting bureau so you’re not alone if you’re wondering what it is and why you should care. We’re here to help you become a little Wisr on credit scores in a way real people can understand. Let’s break it down…
So, what’s a credit score then?
First off, you may have three of them. We’ll cover why a bit later on. So really, the question should be “what are your credit scores?” Plural. Oh, and you might hear them referred to as “credit ratings” as well – same thing.
Right, now that we’ve covered that, your credit scores are numbers that represent your credit risk. They provide a way for credit reporting bureaus to try and quantify how likely, or unlikely, you might be to repay your bills. Don’t freak out – your credit score isn’t the only factor lenders consider, but it is usually one of the main considerations to find out where you stand in your financial behaviours. It’s also easy to increase your score once you know what it is and how to improve it. Nice.
How are credit scores calculated?
The short answer is that every credit reporting bureau has a different way of calculating their score.
The longer answer is that the credit reporting bureaus will look at your credit history and make a determination based on their own algorithms. Unfortunately, the algorithms they use are unavailable to the public for fear of trying to “game the system,” but following good financial practices will help make sure you’re going to land in the higher range of scores. You may also hear the term “credit report” floating around. Credit reports are different to credit scores and are made up of information like: demographics, types of companies you’ve taken out credit with, the amount of credit you’ve borrowed, how many credit applications and/or enquiries you’ve completed and any overdue payments you may have had. Basically, it’s a report of your financial life known as your credit history.
Credit score (credit rating) = a number calculated from all available information on your credit history.
Credit report = comprehensive collection of your personal and financial details used to determine your credit score.
You can see a general explanation how each credit reporting bureau determines their score on their websites or you can read our Anatomy of a Credit Score article.
What does a credit score mean for you?
Effectively, the higher the score, the better your creditworthiness.
Your creditworthiness is the same as saying how dependable you are to repay your debts. When you’re seen to be more creditworthy, you’re likely to benefit from lower interest rates and being more easily accepted when applying for any more credit. It becomes pretty important when you go to borrow money for a home, wedding, car or any other large purchase.
Why you should check your score
Aside from just knowing where you stand and how easily you might be able to access credit, you’ll also want to be sure no one is swooping in on your identity or making mistakes on your credit report. It shouldn’t happen often, but it does happen.
If your scores aren’t within range of each other, it might indicate you have a mistake on your report or there’s been identity theft. That’s why using a service where you can compare multiple scores is so helpful. If something doesn’t seem right, you should get in touch with the relevant credit reporting bureau to find out what might be going on.
Some ways you could boost your credit score
We have a whole blog post on this subject, but since you’re here, these are a few things you can do to boost your score:
- Paying your credit card off in full each month or at least making sure you meet your minimum monthly payment
- Looking into debt consolidation (we can help with that!)
- Limiting the number of times you hit your credit report with enquiries
- Paying your rent, utilities and other bills on time
- Remembering not all lenders are treated the same (e.g. Payday enquiries may be viewed negatively)
Have a look at our 7 Ways to Improve Your Credit Score post for more detailed information.
The bottom line
Many life moments may depend on your credit score, so best to check it out now.
Disclaimer: This article contains general information only, and is not general advice or personal advice. Wisr Finance Pty Ltd does not recommend any product or service discussed in this article. You must get your own financial, taxation, or legal advice, and understand any risks before considering whether a product or service discussed in this article may be appropriate for you. We have taken reasonable efforts to ensure that the information is accurate at the time of publishing, but the information is subject to change. We may not update the article to reflect any change.