If you’re one of the many Australians financially impacted by COVID-19, who have deferred $218 billion worth of payments this year – fear not. Your credit score is unlikely to be affected by payment deferrals or mortgage holidays due to the current state of the world.
While that’s good news, it’s still important to maintain a high credit score by understanding how it’s calculated and what you can do to maintain it in future.
So, what is a credit score?
A credit score is a number between zero and 1200 that reflects how much money you have borrowed, the way you use credit and your history paying off any loans and credit cards. This is calculated based on many sources of information including:
- Your personal details like your age, income and living arrangements.
- Financial information like how many loans and credit cards you have.
- Your bill paying history for expenses like energy and phone bills.
While your credit score is a record of positive information, such as your track record making repayments on time and in full, it also encompasses negative information such as late payments, court adjudications, bankruptcies and insolvencies.
All in all, the higher the score, the better and the more likely lenders will be to approve loan or credit card applications you might make. The lower the score, the riskier you will be perceived by lenders, making them less inclined to approve your application for a loan, which is why having a high credit score is important.
How is it calculated?
Credit bureau are responsible for consumers’ credit scores, which are calculated across the bands below:
- Excellent: 841 – 1,200
- Very good: 756 – 840
- Good: 666 – 755
- Average: 506 – 665
- Below average: 0 – 505
What is a credit report?
A credit report sits alongside your numeric credit score and contains all the information used to determine that number. The report includes detailed information about the way you handle credit, such as your repayment history, as well as any defaults or overdue payments. It also encompasses information about your active loans and credit cards such as their value and repayment amounts.
Be aware your credit report will include a record of any defaults if you miss a payment valued at $150 or more that’s overdue for more than 60 days.
What’s it used for?
Banks and other financial institutions check your credit score and your credit report to see how likely you are to be able to make your repayments on new loans or credit cards for which you apply. Banks, telcos and energy companies also check this information every time you apply for credit with them.
What might cause your credit score to drop?
There are a range of reasons your credit score could drop, such as when you pay off a loan or cancel a credit card. While this might be confusing, this is because lenders have less information to assess how reliable you are at paying off debts or assessing loan applications.
Your credit score can also drop when you successfully take out new credit. This is because the average ‘age’ of your debt drops with the new loan. Over time, when lenders see you making regular payments on your new card or loan, your credit score should increase once more. Your credit score will also drop if you miss a payment, are routinely late making payments, or, if you go bankrupt.
How can I improve my credit score?
There are lots of steps to take to improve your credit score, including:
Pay your bills and loan repayments on time, and, in full. It’s an idea to set up direct debits so all of your obligations are automatically paid. This could help minimise the risk of missing a repayment and having this affect your credit score.
Don’t apply for too many new lines of credit, for instance multiple credit cards, at the same time. Lenders can take this as a sign you’re experiencing a cash flow crisis and need access to money fast, which can put you in the higher-risk category as a borrower.
Lower your credit limit. Lenders like to see borrowers using credit responsibly by paying off their repayments on time, and, in full.
Will my credit score be affected if I have deferred my mortgage repayments?
Banks have allowed borrowers who have been affected by COVID-19 shutdowns to defer loan and mortgage repayments for up to six months. Rest assured your credit score will not be affected if you have deferred your loan repayments.
This means that your credit report will not include a record that you have missed a payment as a result of deferring your repayments due to COVID-19. However, your credit score may be impacted if you have missed a payment on a loan or credit card for other reasons.
What should I do if I think my credit score is wrong?
You can take steps to correct your credit score if you think it’s wrong. Contact the credit reporting agencies to amend details such as your name and address. If the error involves incorrect defaults or information on your file that is a result of identity theft, contact your credit provider.
If you would like some personalised advice on any concerns regarding your credit score please contact us.