Credit Score Demystified: Essential Facts for Everyone

When it comes to getting your loan application across the line, it’s crucial that you understand your credit score. 

Even if your credit score isn’t at the level you need it to be to secure your financing, you can still improve it with careful financial management. 

In this blog, we’ll take a deep dive into what your credit score is, why it matters, and what increases and decreases it. 

What is my credit score? 

In Australia, a good credit score is a key indicator of your financial reliability, typically ranging from 0 to 1,200. This score is generated by credit reporting agencies and is based on various elements of your credit history, such as:  

• Payment history: Consistently paying your bills on time can positively impact your score.
• Credit utilisation: The amount of credit you’re currently using compared to your total available credit.
• Credit inquiries: Each time you apply for credit, a hard inquiry is recorded, which can affect your score.
• Length of credit history: The age of your credit accounts also plays a role.

Credit scores in Australia are categorised as:

• Excellent: 800 – 1,200
• Very Good: 700 – 799
• Good: 625 – 699
• Average: 550 – 624
• Poor: 0 – 549

Your credit score is important for lenders, insurers, and even landlords, as it helps them assess your financial trustworthiness. A higher score can lead to more favourable loan conditions and lower interest rates.

What is a credit inquiry? 

When applying for a loan or credit card, the lender will have to check your credit score. This includes making a credit inquiry to check your score. 

There are two kinds of credit inquiries, soft and hard inquiries. 

Soft inquiry 

A soft credit inquiry, or soft scrape, is a type of credit check that doesn’t affect your credit score. This occurs when your credit is reviewed for informational purposes rather than for a lending decision. Common situations where soft inquiries happen include:

• Self-checks: When you look up your own credit report.
• Pre-approval evaluations: When lenders assess your credit to see if you qualify for potential offers without formally applying.
• Employment screenings: Employers may perform soft inquiries during the hiring process to evaluate candidates.

Since soft inquiries have no impact on your credit score, they are generally considered low-risk compared to hard inquiries, which occur when you apply for credit and can result in a temporary decrease in your score.

Hard inquiry

A hard inquiry, or hard scrape, happens when a lender or financial institution reviews your credit report as part of evaluating a loan or credit application. Unlike soft inquiries, hard scrapes can affect your credit score, often leading to a minor, temporary dip. Common scenarios for hard inquiries include:

• Credit card applications: When you apply for a new credit card, the issuer checks your credit history.
• Loan applications: This includes personal, auto, or mortgage loans.
• Rental applications: Landlords may conduct a hard inquiry to assess your financial reliability.
  

Hard inquiries can remain on your credit report for up to two years, but their impact on your score decreases over time. Multiple hard inquiries within a short timeframe may raise concerns for lenders, so it’s best to be cautious about how often you seek new credit.

Tips to improve your credit score 

Your credit score doesn’t last forever. You can improve your credit score with careful money management. 

If you’re looking to boost your credit score, we have three top tips to help get you started. 

Pay Your Bills on Time: Your payment history makes up a big chunk of your score. Setting up reminders or automating payments can really help you stay on track. No one wants a late payment ding, right?

Watch Your Credit Utilisation: Keep an eye on how much of your available credit you’re using. Aim for that sweet spot below 30%. If you can pay down some balances or keep them low, you’ll see a nice bump in your score.

Check Your Credit Report for Errors: It’s a good idea to peek at your credit report every now and then. Sometimes there are mistakes that can drag your score down. If you spot any errors, dispute them! Getting those sorted out can really help.

Stick with these tips, and you’ll likely see your credit score improve over time!

TL;DR

In Australia, credit scores range from 0 to 1,200, categorised as follows:

• Excellent: 800 – 1,200
• Very Good: 700 – 799
• Good: 625 – 699
• Average: 550 – 624
• Poor: 0 – 549

Your score reflects financial reliability based on:

• Payment History: Consistent on-time payments boost your score.
• Credit Utilisation: Lower utilisation compared to available credit is better.
• Credit Inquiries: Fewer hard inquiries help maintain your score.
• Length of Credit History: Older accounts positively impact your score.
• Types of Credit Inquiries:

Soft Inquiries: No impact on score (e.g., self-checks, pre-approval).

Hard Inquiries: Can temporarily lower score (e.g., loan or credit applications).

Tips to Improve Your Credit Score:

Limit Hard Inquiries: Be cautious about applying for new credit frequently.

Pay Your Bills on Time: Set reminders or automate payments.

Manage Credit Utilisation: Keep it low relative to your total credit.