People often take out loans or lines of credit without considering how they will influence their credit score. Here’s RateCity’s review of the definition of a credit score, credit score ranges, how a credit score is calculated, impact to your credit score and how to improve your credit score.

What is a credit score?

A credit score signifies your worthiness as a borrower based on your credit history. A credit score is assigned based on your credit history and debt-using details from your credit file.

Each credit reporting bureau has its own method for assigning credit scores. For example, Equifax, a popular consumer credit reporting agency in the United States that recently acquired VEDA in Australia, assigns a score between 0 and 1200. This is known as the Equifax Score and is calculated after considering your credit history and related details.

Banks and creditors use your credit score when deciding whether to lend you money or approve your loan application. A good credit score establishes your reliability as a borrower.


Understand credit files and credit scores

Credit file

Your credit file is a synopsis of your credit history, including:

  • your credit details
  • credit taken in the last five years
  • delayed or default payments
  • repayment history
  • any case of bankruptcy
  • a list of credit applications (including unapproved credit applications)
  • your personal details

Credit Score

A credit score is a numerical digit, whereas a credit file is the overall summary of your credit history. Your credit score helps you understand where you stand as a borrower. Being a numerical representation of your borrowing capacity, a credit score is used by banks or lenders throughout the country to give you a snapshot of your financial status. It also provides assurance to the borrower before they approach a lender for a loan or credit card.

Your credit score can be accessed by lenders, banks and utility companies. A decent credit score indicates that you are likely to pay back your loans or credit cards. One should strive to maintain a good credit score to be considered a good risk to a lender.


How is your credit score calculated?

Different credit bureaus calculate your score by assigning a unique weight to various factors.

Your Equifax Score is calculated using the following factors:

  1. Number of credit accounts: People open and maintain multiple bank accounts for different purposes. This might be an indication of past credit issues and could impact your credit score. It also applies to the number of issued credit cards.
  2. Number of transactions: A high number of credit transactions in the past few months will increase the records in your credit history, which might negatively impact your overall credit score.
  3. Number of loan applications: A high number of loan applications can lead to further scrutiny and a lower credit score.
  4. Frequency of transactions:Your credit score can also be affected by the spread of credit transactions in the past few months. If many transactions have occurred, it might lead to a lower credit score.
  5. Repayment history:The number of delays or late payments might influence your credit score negatively.
  6. Credit infringements: Serious issues, such as defaulting on a loan or credit line, bankruptcy, fraudulently obtaining credit, stopped payments and delinquency can negatively affect your credit score. 


Range of Equifax credit scores

According to Equifax Credit Score System, your credit score can be between 0 and 1200 depending on multiple factors, outlined in the following credit score bands and ranges:

  • 833 – 1200: Excellent
    Shows you are a reliable borrower and among the top 20 percent of the credit-active population of Australia. Your odds of keeping a clean file are five times better than the average Equifax credit-active population.
  • 726 – 832: Very good
    Shows that although you had your share of financial misses, you still have a decent score. Your chances of keeping a clean credit report are two times better than the average Equifax credit-active population.
  • 622 – 725: Good
    Your odds of keeping a clean credit report are better than the average Equifax credit-active population. It’s less likely you will face an adverse event in the next 12 months.
  • 510 – 621: Average
    It’s likely that you might experience an unfavourable event such as a default, bankruptcy or court judgment in the next 12 months.


Factors affecting your credit file

  • Personal details: Your age, duration of employment and the number of years at your current address.
  • Age of credit history: A newer credit file with only recent transactions is treated differently than a credit file with a longer credit history with older transactions.
  • Commercial credit history: If you own a business, this includes your business location, number of years since the inception of your business and related credit history information.

How can I improve my credit score?

Your credit score cannot be improved overnight. You need to work diligently toward improving it. Here are a few ideas to help you maintain or achieve a healthy credit score:

  • Check your credit report: Ensure there are no errors (e.g. late payments) reported incorrectly in your credit file. Address any errors with the credit bureau.
  • No overdue debts: Be sure to pay your bills on time. Set up payment reminders through your banking portals or your personal device.
  • Reduce your number of loan/credit applications: Submit applications after preparing and arranging the relevant documents to increase the chances of approval and lessen the number of submitted applications.
  • Reduce your debt: Try to decrease your existing debt to maintain a good credit score.