Applying for a loan? You'll need to know this magic number
If you've ever applied for a loan, credit card, or watched a lot of American TV shows, you've probably heard the term 'credit score' thrown around. But what are they, and do they really matter in an Australian context?
Credit reports inform your credit score. These reports cover three main things: how many times you've applied for credit, the amount of money you've borrowed and whether you pay your bills on time.
The exact calculations that determine ng credit scores are a mystery to the public. But what we do know is that there are things you can do to keep yours in good shape.
The terms 'credit ratings' and 'credit scores' are often used interchangeably, but they're not the same, explains Elsa Markula, CEO at ARCA, the Australian industry association dedicated to consumer credit.
'A rating will provide a range as to how a consumer ranks in terms of their creditworthiness,' says Markula. This rating is summarised in a word or two, such as below average, average, good, very good and excellent.
'Whereas a credit score provides a precise number. That number seeks to summarise the information held on your credit report.' This number is typically between 0-1000 or 0-1200, depending on the reporting source.
Australia has three main credit reporting bodies: Equifax, Experian and Illion. As an example, Equifax's credit score range is 0-1200, broken into five bands: below average (0-459), average (460-660), good (661-734), very good (735-852), and excellent (853-1200).
How are credit ratings and scores used?
Lenders often look at credit ratings and scores before approving personal loans, home loans and credit cards. Ratings and scores give a good overall insight into your creditworthiness and whether it might be a risk lending to you.
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