What factors affect your credit score?

Whether you’re applying for a mortgage, a loan, a credit card, a job or even an apartment to rent, 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 agencies which examine your credit history to determine your credit score are Experian, Illion, and Equifax.

Earlier, credit scores in Australia reflected only adverse credit events. But with the introduction of the comprehensive credit reporting (CCR) in 2014, they may soon provide a more balanced picture of your credit history, also reflecting positive financial behaviour such as on-time repayment.

Each credit rating agency employs its own algorithm to calculate credit scores, so each of them is likely to assign a slightly different score for the same individual. But all three of them 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, default judgments or bankruptcies if any.

What is a good credit score?

Although different agencies 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 relatively 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
• Using the entire credit limit available to you

Further, if you’re a young adult Australian who has not yet developed a lengthy credit history, this is understandable. Keeping the above in mind, you may be able to begin building a good credit score by having your own phone plan separate to your parents, or getting your name on an energy or gas bill.

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.

• Does a credit card money transfer affect your credit score?

Transferring money from your credit card to a debit card or a transaction account does not show up on your credit report. So it may not affect your credit score directly. But most of the banks that allow money transfers from a credit card treat it as a cash advance, so it attracts the same fees and interest rates. Since these are usually higher than normal, it could affect your repayment plan, resulting in you missing payments, which could affect your credit score.

• Do medical bills affect your credit score?

Just like credit card money transfers, medical bills by themselves do not affect your credit score, unless you default on the payment and the hospital or healthcare provider then transfers your debt to a collection agency. It can then get reported to a credit bureau and will 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, provided you have some other debt like a loan or a mortgage. While this may seem counterintuitive, not having an active line of credit may be like having a blank credit history. So lenders have less ways of knowing whether you’re a responsible borrower, and this can lower your credit score.

• 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 unless you default on a payment. If you do they can report it to a credit rating agency and this will hurt your credit score. For late payment to qualify as a default, the amount due has to be more than $150, and it has to be due for more than 60 days. These companies also need to have taken reasonable effort to contact you and recover the outstanding.

• 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. If you are rejected when applying for a financial product, such as a credit card or a home loan, this will reflect negatively on your credit report. Ensure you've done your research around that financial institutions’ eligibility criteria before applying for any product.