Credit score has been impacted, millions of Australians have been financially impacted by the covid-19 pandemic. In the past year a total of $218 billion worth of payments have been deferred. Your credit score is unlikely to have been affected by mortgage holidays or payment deferrals despite the current state of the world.

Although this is great news, it is still very important to maintain a high score on your credit by understanding how it is calculated and what you can do to maintain it in the future.

What is a credit score?

A credit score is a number between zero and 1200 that reflects how much money a person or business has borrowed, the way you use credit and also your history off paying off loans and credit cards. This is calculated based on many sources of information such as

  • Your personal details like your age, income and living arrangements.
  • Your bill paying history for expenses like energy and phone bills.
  • Financial information like how many loans and credit cards you have.
  • While your the score of your credit is a record of positive information, such as your track record making repayments on time and in full, it also encompasses negative information such as late payments, court adjudications, bankruptcies and insolvencies.

Ultimately the higher the credit score, the better and the more likely lenders will be willing to approve loan or credit card applications you might make. The lower the score, the riskier you will be perceived by lenders, making them less inclined to approve your application for a loan, which is why having a high credit score is important.

How Is It Calculated?

Excellent: 841 – 1,200

Very good: 756 – 840

Good: 666 – 755

Average: 506 – 665

Below average: 0 – 505

Credit Score Has Been Impacted, What is a credit report?

A credit report sits in conjunction with your numeric credit score and contains all the information utilised to determine that number. The report includes detailed information about the way you handle credit, such as your repayment history, as well as any overdue payments or defaults. It also encompasses information about your active loans and credit cards such as their value and repayment amounts.

It is important to know that your credit report will include a record of any defaults if you miss a payment valued at $150 or more that’s overdue for an excess of over 60 days.

What’s it used for?

Banks and other financial organizations check your credit report and credit score to determine how likely you are to be able to make your repayments on new loans or credit cards for which you apply for. Banks, energy companies and telcos also check this information every time you apply for credit with them.

Things that cause your credit score to drop

There are a large number of different reasons your credit score might drop, such as when you pay off a loan or cancel a credit card. While this might be confusing, this is because lenders have less information to assess how reliable you are at assessing loan applications or paying off debts.

Your credit score might also drop when you successfully take out new credit. This is because the average ‘age’ of your debt drops with each new loan. Over time, when lenders see you making regular payments on your new loan or card, your credit score should increase once more. Your credit score will also drop if you miss a payment, are routinely late making payments, or, if you go bankrupt.

How can I improve my credit score?

There are many different steps you can take to improve your credit score, including:

  • Pay your bills and loan repayments on time, and, in full.

It’s also a great idea to set up direct debits so all of your requirements are automatically paid. This could help minimise the risk of missing a repayment and having this affect your credit score. 

  • Don’t apply for too many new lines of credit, for instance multiple credit cards, at the same time. 

Lenders can take this as a sign you’re experiencing a cash flow crisis and need access to money fast, which can put you in the higher-risk category as a borrower.

  • Lower your credit limit. 

Lenders like to see borrowers using credit responsibly by paying off their repayments on time, and, in full. 

Will my credit score be affected if I have deferred my mortgage repayments?

Banks have enabled borrowers who have been affected by COVID-19 shutdowns to defer loan and mortgage repayments for anywhere up to six months. Rest assured your credit score will not be affected if you have deferred your loan repayments. 

This means that your credit report will not include a record that you have missed a payment as a result of deferring your repayments due to the covid-19 pandemic. Despite this, your credit score may be impacted if you have missed a payment on a loan or credit card for various other reasons.

Credit Score Has Been Impacted, What should I do if I think my credit score is wrong?

There are steps that can be taken to correct your credit score if you think it’s incorrect. Contact the credit reporting agencies to amend details such as your name and address. If the error involves incorrect defaults or information on your file that is a result of identity theft, contact your credit provider.

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