What factors affect your credit score?

Whether you’re applying for a mortgage, a loan, a credit card, or even a job, your credit score could be one of the key things that determines your eligibility.

Although most lenders have an internal credit scoring system of their own, they will refer to your credit score while evaluating your application. So, it is essential to understand how your credit score is calculated, the factors that influence it, and what a good credit score is.

How is your credit score calculated?

A credit bureau, or credit rating agency, is responsible for calculating your credit score. In Australia, the three most reputed rating bureaus which examine your credit history to determine your credit score are Equifax, Experian and illion.

The introduction of the comprehensive credit reporting (CCR) in 2014 has meant that your credit report will provide a more balanced picture of your credit history, reflecting positive financial behaviour such as on-time repayment.

Each credit rating bureau employs its own algorithm to calculate credit scores, so each of them is likely to assign a slightly different score for the same individual. However, all three of them will consider some common factors such as:

• The length of your credit file;
• What accounts you have opened and closed, including bank accounts, phone plans and utilities bills;
• The type and amount of credit you have applied for in the past;
• The type of lenders you approached;
• The number of applications and any rejections;
• Your repayment history;
• Negative credit listings, if any; and
• Court writs or default judgements.

What is a good credit score?

Although different bureaus also categorise credit scores differently, as seen in the table below, a figure of 700 or more is considered in a healthy range.

What should I do to get a good credit score?

Once you know the factors that affect your credit score, it becomes easier to avoid financial decisions that may impact your score negatively.

Some of the things that you need to avoid include:

• Frequently missing payment due dates
• Applying for too many credit cards
• Closing credit accounts that have a good repayment history
• Not checking your credit report regularly and correcting errors, if any

Are there other factors that can affect your credit score?

Some of the common queries about what affects your credit score are:

• Do balance transfers hurt your credit score?

Several credit cards offer a balance transfer facility that would allow you to pay off your outstanding at a lower interest rate than what your current credit card does. If this helps you consolidate your debts and help with repayment, it can actually have a positive effect on your credit score. But if you do this too frequently, or miss payment due dates, it can lower your credit score.

• Do medical bills affect your credit score?

Medical bills by themselves do not affect your credit score, unless you default on the payment. It can then get reported to a credit bureau and will be recorded on your credit report, and affect your credit score negatively.

• Is not having a credit card bad for your credit score?

Not having a credit card by itself may not harm your credit score, as there are other credit accounts, like a loan or mortgage that can be recorded on your credit report. Not having any active line of credit may be like having a blank credit history, which means lenders have less ways of knowing whether you’re a responsible borrower.

• Do late payments on your phone and utility bills hurt your credit score?

Since telecom and utility service providers aren’t licensed credit providers, they cannot disclose your repayment history but they do have the authority to report if you default on a payment. For late payment to qualify as a default, the amount owed has to be more than $150, and it has to be due for more than 60 days.

• Does getting rejected for a loan or credit card affect your credit score?

Every application for a loan or credit card is registered on your credit report irrespective of the outcome. Ensure you've done your research around that financial institutions’ eligibility criteria before applying for any product.