What's a credit score, and why should you care about it?

A credit score is a culmination of your credit history, and it acts as a numerical representation of how financially responsible, reliable, and trustworthy you are in the eyes of financial institutions.

If you’ve got a history of missing loan repayments and maxing out your credit cards, you’ll probably be deemed a ‘risky borrower’. Having a low credit score can negatively affect your chances of securing a loan, the amount you receive, and the interest rates you have to pay. That’s potentially hundreds, if not thousands of dollars in extra interest coming out of your back pocket!

A low credit score can make applying for a mortgage a bit of a nightmare, so if you’re looking to buy a home any time soon, you’ll want to start improving and keeping tabs on your credit score now.

How is your credit score calculated?

Your credit score is calculated on both the positive and negative financial history within your credit file.

The system rewards prompt payments, and low debt, and penalises late payments and financial instability.

This means:

  • If you pay off your loans on time and consolidate all of your debts into one, your score will improve. 

  • If you miss bill payments or default on your loans, your score gets worse.

Your final credit score is a culmination of factors, including:

  • Your oldest and youngest accounts, as well as the average age of all of your accounts.

  • The age of your current line of credit.

  • How active your accounts have been, including home loans, car or vehicle loans, private bank loans, study loans, rent, retail installment finances from private lenders and other similar activity.

  • How many accounts you’ve opened recently.

  • Overdue or late payments, including any payment defaults.

  • Any enquiries made of your credit report over the last five years.

  • Your monthly repayment history, including credit cards, mortgages, car finance, hire purchases, home loans, car loans or any other form of loan or credit.

  • Payment history for other everyday expenses such as electricity and energy bills, gas, and phone accounts.

  • Court judgements against you, in the case of outstanding debts, Non Asset Procedures (NAP), Summary Instalment Orders (SIO) and Bankruptcies.

Why you should care about your credit score

It’s essential to start working on your credit score as soon as you can, or you may not be able to borrow money when you most want and need it—to buy a car, for example, or to purchase your first house.

The better your credit score, the less that loan will cost. The total price of your home can be reduced by thousands of dollars over the life of the loan if your credit score is excellent, instead of poor or good.

It’s always better to establish good credit early, so you will be able to secure the best possible interest rate when it’s time to obtain a mortgage to buy a home.

If your mortgage application gets declined from your bank, then next option would be to look into non-bank lending. Check out our article on non-bank lending, to learn about when and why you may need it.