How is Credit Score Calculated in Australia?

Hint: It’s All Down to Your Credit Activity and Some Clever Algorithms

If you’ve applied for a loan or credit card before, you’ve no doubt heard of the term credit score.

While you may be aware that having a bad credit score isn’t good, you might not understand exactly what one is or how credit scores are calculated here in Australia. Don’t worry—a lot of people don’t.

That’s why we thought we’d share all of the credit score secrets (from key factors they consider to credit checks and credit score calculators) and give you some tips on boosting your score.

What is a Credit Score, and Why is it Important?

Your credit score is a number that represents your creditworthiness. In other words, how reliable you are as a borrower.

It’s calculated by credit reporting agencies, such as Equifax, Experian and illion, based on the information contained in your credit report (credit file).

In Australia, credit scores typically range from 0 to 1,200—the higher your score, the better your creditworthiness.

A good credit score (700+) can help you secure lower interest rates on loans, credit cards and other forms of credit. It can also make it easier to be approved for credit, as lenders are more likely to view you as a low-risk borrower.

How is a Credit Score Calculated?

To calculate your credit score, credit reporting agencies use what’s called a credit scoring model.

Credit scoring models, also known as ‘scorecards’ in the industry, use a mathematical algorithm and a variety of factors to estimate the probability of payment default or other credit events.

The most commonly used credit scoring models in Australia are Equifax, Experian and illion. The exact algorithms used by these models vary by brand. This means you technically have more than one credit score.

Factors That Influence Your Credit Score

Credit scoring models generally take into account the following factors:

Your Payment History

Your payment history is one of the most important factors in determining your credit score. It refers to whether you’ve made your credit payments on time and in full. Late or missed payments can have a big negative impact on your credit score.

Your Credit Utilisation

This means the amount of credit you’re using compared to your allowed credit limit. For example, if you have a credit card with a $10,000 limit and you’ve used $8,000 of that limit, your credit utilisation rate is 80%.

High credit utilisation rates can indicate that you’re relying too heavily on credit, which can be viewed as a red flag by lenders.

Your Credit History

Your credit history refers to the length of time you’ve had credit accounts open. Generally, a longer credit history is viewed more favourably than a shorter one, as it indicates you have a track record of managing credit responsibly.

Your Credit Mix

The types of credit you have also play a role in your credit score. Having a mix of credit accounts, such as credit cards, auto loans and mortgages, can indicate that you’re a well-rounded borrower who can handle different types of credit.

Recent Credit Enquiries

When you apply for credit, a credit enquiry is generated, which can have a small impact on your credit score. If you have too many recent credit enquiries, it can indicate that you’re actively seeking credit, which can be viewed as another red flag for lenders.

Personal Information

Credit scoring models may also consider personal information, including your age, where you live, your income and your employment history.

In addition to this, they’ll also take into account any Part IX (9) Debt Agreements or Part X (10) Personal Insolvency Agreements relating to bankruptcy.

How Long Does Information Stay on Record?

Different types of information can be held on your credit record for different amounts of time as follows:

• Credit accounts and relationships: Ongoing (then up to 2 years after they’ve closed or ended)
• Repayment history: Up to 2 years
• Credit enquiries: 5 years
• Payment defaults (over $150): 5 years
• Serious credit infringements (incl. fraud): 7 years
• Court judgements: 5 years
• Bankruptcies: Generally 5 years

How to Check Your Credit Score

Credit reporting agencies are required to give you free access to your credit report once every three months. In addition, you can request a copy if:

• You’ve been refused credit in the past 90 days
• Your credit-related personal information hasn’t been corrected

You can also check your credit score on free sites, including My Credit File, illion, Equifax, Experian and Clear Score or get an approximate score using a free online credit score calculator.

As your credit score isn’t fixed (it reflects your situation only at the time a check takes place), it’s a good idea to check it regularly.

It’s also a good idea to check it when applying for a loan or credit card, if you’re waiting for a negative event to be wiped from your record or you think you’ve been the victim of identity theft.

Tips to Improve Your Credit Score

If you discover or already know you have a poor credit rating, here are our recommendations on what you can do to improve it:

• Check for errors: Request a free copy of your credit report and review it for errors, such as incorrect account information or missed payments, and dispute any errors you find.
• Pay (certain) bills on time: While it's clearly wise to pay your bills on time in general, late payments on bills have no impact on your credit file, unless it is a contract where the repayment history is reported to your credit file (e.g. some mobile phone plans). If you don't pay a power bill, it would have no impact on your credit score unless the provider eventually tries to list a credit default on your file due to a lengthy period of non-payment.
• Reduce credit card balances: Keep your balances low, ideally below 30% of your credit limit. This demonstrates responsible credit usage.
• Limit credit applications: Limit credit applications to only when necessary. Consider using a broker for credit applications because a broker can help assess your eligibility before you apply and then have an application for credit noted on your file.
• Keep old credit accounts open: As the length of your credit history is a factor in your credit score, keep old credit accounts open, even if you don't use them.
• Set a budget to reduce reliance on smaller lending: Buy Now, Pay Later (BNPL), pay advances or payday loans can add up quickly and make it easy to miss payments. They can also be viewed negatively by other lenders, even if the payments are made in full and on time, and your overall credit score is positive.
• Apply for hardship before you miss a payment: While entering into a hardship arrangement is noted on your credit file, it's the missed payments that can impact your credit score, not the hardship status itself. By proactively requesting hardship assistance before a payment is missed, you can help mitigate any negative impact on your credit score, as it may prevent missed payments from being reported.

Knowledge = More Financial Freedom

Now you know how credit score is calculated in Australia, you’ve taken the first step to improving your creditworthiness and accessing better financial products.

If your credit score isn’t looking good and you’re struggling to improve it, get in touch with our team of debt solution specialists today on 1800 534 534 for professional, non-judgmental support and advice.