Credit scores: What are they and why do they matter?

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  6 min

Learn more about

• What a credit score is and why they’re important
• Simple and effective ways you can improve your credit score
• The common credit score myths – don’t worry, we debunk them

Ahh, the good old credit score! You hear about them everywhere, and they sound important to your financial future.

But what is a credit score? And why are they so important for lenders? Well, we’ve got the answers to these burning questions and more. Let’s dive right in.

What is a credit score?

A credit score is a number or ‘rating’ given to your credit history, so how you’ve repaid debts or used credit over time. According to MoneySmart, your score will be between 0 and 1000 (or 1,200 depending on the credit reporting agency)

What affects your credit score?

Your credit score is based on:

• the amount of money you’ve borrowed from a lender
• what type of credit applications you’ve made – think things like pay day lending, mortgage, credit card or personal loans)
• whether you've been repaying your loans on time

While it’s not the only factor lenders look at when assessing credit applications, the higher your score, the less risky you appear to the lender. Your credit score could be the difference between getting a better deal on your loan, saving money or being more likely to get the loans you apply for.

Brain hack: The optimism bias is a way of thinking where we believe negative events aren’t likely to happen and we overestimate positive things happening instead. If you’ve got a credit score – and it’s pretty high – you might think that missing your credit card or loan repayments won’t affect your score at all. But in reality, the more you skip your repayments or miss utilities payments, the lower your score might be. While it’s all fine and dandy to have a positive mindset, it’s also important that you don’t lose sight of the reality of your financial commitments and be overconfident.

Do you have a credit score?

No, you don’t automatically have one. But you can request one, if you already have credit – and it’s likely that at some point during your adult life, you’ll need one in order to apply for a mortgage to buy a house or get a personal loan. You can also check your credit score at any time. The Australian government’s MoneySmart website has lots of helpful information and a list of businesses you can request a credit score from.

Is your credit score set in stone?

No! You can always work to improve your credit score and take advantage of building up a strong credit history.

If life gets in the way and things slip through the cracks – for example, missing a couple of loan repayments or paying late on your credit card – your credit score might end up lower than you’re hoping for, but there are many things you can do to get back on track.

How can you improve your credit score:

“It’s about continuing to demonstrate to your creditors, or the businesses you owe money to, that you can keep on top of your payments,” says ANZ expert Jade Khao.

According to Equifax, the average credit score in Australia is 846. So, if you want to reach or beat this score, then we’ve got four quick ways you can improve your credit score:

• Acknowledge any past issues with your lender and look for new, achievable ways to help you pay off any outstanding debts with them.
• Create positive money habits and behaviours to help you bump up your credit score – think paying your mortgage, credit card and bills like utilities on time.
• Limit how many applications you make for credit.
• Request your credit report and ensure the details are correct and up to date: any discrepancies might affect your score even if they’re not accurate.

3 myths about credit scores debunked

Since this can be a confusing area of our financial world, there are a lot of myths and misconceptions floating around – and it’s important for the health of your score not to get sucked into these falsehoods. Luckily our ANZ expert is on hand to make the workings of your credit score crystal clear.

1. Regularly checking your credit score is bad

According to Jade, not exactly. There are two types of credit enquiries:

“When you officially apply for credit, that’s a ‘hard’ enquiry and that goes onto your credit score.

“Checking information about your history won’t impact your credit score. You can perform this check as often as you like. You’re not applying for credit, just seeking information about your score. So nothing goes on record and your score won’t change.”

2. If you're married, your credit score is combined with your partners

Unlike a lot of other financial information, your credit score is not shared with your significant other.

“Some people think that just because you’re married your score combines,” Jade says. “That’s not true – everyone has their own credit score.”

3. Credit scores are scary – like really scary

“Don’t be scared of credit scoring,” Jade says. “If you’re not familiar with the detail, it’s easy to get anxious and scared. However, as long as you’re working to meet your loan repayments and reaching out for help when you need some guidance, there’s no need to be worried.

“It’s all about keeping track of your existing debt, or assessing the loans you want to take out, and thinking about whether you can make those repayments or if you need to rethink your plan.”