Credit history and credit ratings

If you've never taken out a person loan before or investigated getting a credit card, you may not have come across the concept of a credit rating or 'creditworthiness'. But if you are looking for some kind of financing in the future, this score and the file it sits in could impact the kind of loan options you can access.

So, let's explore exactly what a credit score and credit history is all about.

Just to get you started, a credit history is sometimes referred to as a ‘credit report’. And a credit rating is sometimes referred to as ‘credit score’. Both credit history and rating go into what’s called your 'credit file'. Confused yet? Well, pay attention because this is where this get serious.

Lenders use your credit file to assess your behaviour – whether it be responsible or risky – when it comes to money matters. In other words, your credit history and rating will say a lot about your reliability as a potential borrower, and could impact your application for loans and other forms of credit offered by lenders. Let’s dig deeper.

Your credit history (or credit report) sums up your financial reliability. It tells the creditor or financial institution what you’re like when it comes to paying your bills, repaying existing debt and using financial products like credit cards.

Do you pay your energy and other utilities on time? Have you missed a couple of debt repayments? Or have you missed a lot? This information is collected by a number of credit reporting bodies can be made available to lenders any time you make an enquiry about lending money or making a credit card application.

Your credit history can include information about:

• A history of successful and unsuccessful credit applications
• Credit report requests by lenders
• How many types of financial accounts you have, including when you opened them and how long you held them for
• Overdue bill payments beyond 60 days where debt collection has been issued by your service provider (defaults stay on your credit report for 5 years)
• Your history of credit repayments, including repayment amounts and meeting or missing repayments
• Outstanding debt

Your credit rating or credit score is a point system created from information in your credit file. This can be used as a rough indicator for third parties like a landlord or lender when assessing your credit risk at that particular time. Don't stress if it's not top notch right now – this score changes over time to reflect your current financial behaviour. 

Key details to know about your credit rating:

• It will be displayed as a number from 0-1200, falling somewhere on a five-point scale (excellent, very good, good, average and below average). As a rough example, a good credit score falls between 622-725.
• Different credit agencies may calculate your credit score differently, so could report back with different numbers. 
• Experian, Equifax and Illion are the three free credit reporting agencies in Australia, but there are others.
  You're effectively being compared to other Australians, and this comparison can influence the amount that a lender will allow you to borrow (or if they'll offer credit at all).

You are able to access your credit report (which included your credit rating) freely every 3 months from the credit reporting agencies mentioned above. There are now also a range of online services which offer this freely, as well as companies that will request a fee to let you access a copy of your report. These paid options may be legitimate companies who can tap into the data you need, but consider free options first to avoid forking out the cash.

Being ‘creditworthy’ is what lenders refer to when they want to gauge how likely you are to repay your loan on time, if at all. It doesn’t matter what you personally think about this. If your financial history has some dubious holes in it, the finance consultant dealing with your credit application can’t do anything about it. Your rating is purely objective and your personal life doesn't come into the equation.

If you've been denied a loan or credit card because of a poor credit rating, it may be a good time to reflect and approach your finances differently. Here's some advice from experts on paying off debt and growing savings.

The shift towards Comprehensive Credit Reporting  (CCR) in Australia means credit ratings are now based credit on both ‘positive’ and ‘negative’ factors. This effectively means it considers the responsible actions you take, like paying bills or repaying debt on time, alongside financial missteps like making late credit repayments or opening multiple lines of credit in quick succession.

This helps provide a clearer picture of your financial situation, and can help those who have less experience with credit products build up a positive credit rating. 

Things that can help improve your credit rating include:

• Building up savings and adding to your savings account regularly to help show you have reliable financial habits. Consider setting up a regular deposit after payday to keep it consistent.
• Not moving jobs or houses too often, to again show reliability or stability.
• Holding liquid assets. If you’re older or don’t work full-time you may have assets that are liquid (like property or investments) which can act as a kind of security for lenders.
• Paying bills on time. The actual payment of utilities or phone bills isn’t recorded in your report. However, if you don’t pay on time and accrue debt with these services, a debt collector could be employed or you may be reported to a credit agency (if it’s more than 60 days over due), and both could be recorded on your credit report.
• Taking out a credit card without accruing debt. By using the card and paying it off in the interest-free period, you won’t actually build up debt, but you will prove you can manage this kind of financial product. 
• Keeping your credit card balances low means credit providers will see that you can manage your spending effectively.
• Only applying for credit when you really need to. Each time you make a new credit enquiry – whether it's successful or not – it’s noted in your credit report. This is fine if it's a necessary application, but if you make numerous requests for credit in quick succession, it could send the message to lenders that you're reckless or desperate for credit, which doesn't reflect well on your risk level as a borrower.
• Fixing errors on your credit report. You don't want mistakes to drag down your credit rating. So, if you cross-check your report with bank or loan statements and find inaccuracies, contact your credit provider or the reporting body and request an update (it's a good idea to do this before taking out new debt).

You can contact your credit reporting bodies directly or go through the relevant credit provider to have errors amended free of charge. This may be done swiftly for simple mistakes like your birthday being listed incorrectly or a debt being listed twice, but could take longer if more information needs to be gathered. 

You can enlist the help of financial or legal advisors to ensure you're making all the right moves, and there are free financial counselling services available in Australia. 

• If any of your personal information is incorrect, including name, age residents etc.
• If you’ve paid an outstanding bill and it still displays as a debt.
• If you’re no longer bankrupt, but you’re still listed as so.
• If there’s a list of credit applications that are unfamiliar to you (you may need to treat this matter as a fraudulent case).

Considering a credit card application? Make sure you do thorough research on fees, features and rates, starting with our comparison table below or check our the best credit cards currently on the market.