Anatomy Of Your Credit Score
Understanding what hurts or improves your credit score is a great starting point to improving your financial fitness.
While the exact breakdown is not always clear, Credit Reporting Bureaus (CRB) such as Equifax have provided the general weightings that go towards a credit score.
- 10% – Length of your credit history, and personal information
- 10% – Adverse events (e.g defaults)
- 30% – Repayment history over the last 2 years
- 50% – Number of credit enquiries in the last 5 years
Personal information that goes into your credit score is not so much about what Netflix shows you watch, but more about an individual’s details which may be used to correlate to a risk rating. Personal details like age and postcode and how old your credit file is, also plays a part in your credit score.
If you go bankrupt or default on debts; expect not only your credit score to be severely impacted, but many established financial institutions may not offer you credit for many years.
With Comprehensive Credit Reporting (CCR) coming into place in Australia in 2018, your repayment history is becoming even more important.
Historically lenders might review your repayment history by looking at your recent bank statements to assess whether you might be creditworthy, but CCR will actually mean that a lot of your repayment history will be shared automatically by financial institutions, so it will become baked into your score.
It may seem obvious, but paying back your credit cards and other debts on time will help improve your credit score.
The number of credit enquiries you make, regardless of whether you were approved for the finance or even accepted the offer, plays the biggest part in your credit score. Additionally, the type of credit enquiry can also impact your credit score substantially – because some types of credit enquiries are regarded as high risk indicators.
Generally any enquiry for a relatively small amount (usually under $2,000), that requires quick repayment over several months, with high interest might impact your credit score substantially. These are commonly referred to as ‘PayDay’ lenders. If you are considering this type of lender, MoneySmart (operated by an Australian government department) talk about them here.