Lenders use credit scores to assess the risk associated with lending money to a particular individual. They are calculated by credit bureaus which use a range of factors to measure the likelihood of a borrower defaulting on their loan.
In this article, learn more about how credit scores work in Australia.
What Is a Credit Score?
In Australia, a credit score is a numerical expression that indicates your creditworthiness. It is calculated based on your credit history, which includes your borrowing and repayment activities. Lenders use credit scores to decide if they should approve your loan applications and, if so, on what terms and conditions.
A good credit score is essential for anyone who wants a loan or credit card. Having a good credit score can also help you to secure better loan terms and lower interest rates, making it easier to manage your finances.
What Are the Classifications of Credit Scores in Australia?
1. Excellent Credit Score
This score is considered to be the highest rating. It is usually reserved for individuals who have a long history of timely payments, low credit utilisation, and a good credit mix. Individuals with excellent credit scores typically qualify for the best loan and credit card offers.
2. Very Good Credit Score
This score is one step below excellent and is typically reserved for individuals who have a good credit history but may have missed one or two payments in the past. Like those with excellent credit scores, individuals with very good scores have a high chance of qualifying for the most ideal loan and credit card offers.
3. Good Credit Score
This score is the middle rating and is usually reserved for individuals who have a decent credit history but may have missed a few payments in the past. Individuals with good credit scores may qualify for some loan and credit card offers, though there may be better offers available.
4. Fair Credit Score
This score is one step below good and is typically reserved for individuals who have a limited credit history or have missed several payments in the past. It’s still possible to qualify for loan and credit card offers, but these may not be what you expect.
5. Poor Credit Score
This score is the lowest rating and is typically reserved for individuals with a very limited credit history or who have missed several payments in the past and have a history of defaulting on loans or credit cards. Individuals with poor credit scores may not qualify for any loan or credit card offers.
What Are the Factors That Influence Credit Scores?
1. Credit Enquiries
Every time you apply for credit, it shows up as a credit enquiry on your credit report. This can negatively affect your credit score because it indicates to lenders that you may be financially overextended.
2. Amount of Credit You Borrowed
Taking out too much credit can be a red flag for lenders and indicate that you may be struggling to manage your finances.
3. Repayment History
Paying your bills on time and in full is essential to maintaining a good credit score. Late payments, defaults, and collections can have a major impact on your credit score.
4. History of Bankruptcy
Bankruptcy is a major negative mark on your credit report and can have a significant impact on your credit score. If you’ve declared bankruptcy in the past, it can take several years for your credit score to recover.
By understanding the factors that influence your credit score, you can take steps to ensure you’re doing everything you can to maintain a good credit score. Paying your bills on time, staying within your credit limit, and avoiding bankruptcy can all help you keep your credit score in good shape.
If you are in need of the best home loans in Sydney that meet your credit rating, let our team at Wealthy You help you. We help you see the best mortgage solutions for your needs. Get the options available to you by calling us today!