Retirement
What is a credit score?
Learn what a credit score is and how it influences credit institutions.
What is a credit score?
A person’s credit score usually determines the success of a credit product application, and the terms and conditions surrounding it.
Before a person can borrow a single cent from a lender, the institution typically runs a credit check on the applicant to determine their credit score. Depending on the applicant’s score, the lender will decide whether to approve the amount applied for, tweak the terms of the credit application, or deny it.
What is a credit score?
A credit score is a rating attributed to an individual at a particular period based on their credit history. For most lenders, the score represents a borrower’s creditworthiness. This score is used by lenders to determine whether to approve or decline a credit application or tweak the credit product’s terms.
The score is usually a number from zero to 1,000 or 1,200 and has an equivalent five-point scale rating: below average to excellent. The higher a person’s score, the better their score is, which means the probability of getting their credit application approved is higher.
The credit score, personal information, and credit transaction details may be found in a credit report—a record of an individual’s credit transactions, especially payments.
Credit reports will become comprehensive beginning July 2018, since banks will be required to provide additional credit information. This includes all the credit accounts a consumer owned in the past two years, how much of the balance is paid, and how often and prompt a consumer pays.
What’s in a credit score?
A person’s credit score is calculated using values from their credit history, and scores differ slightly even if credit reporting agencies use the same categories. One reason for this is because agencies such as FICO and Equifax weigh each category differently.
- The final score depends on the categories below:
- Amount of credit: amounts owed and remaining available credit
- Payment history: transactions, late payments, overdue and defaults, etc.
- Type of credit: credit cards, loans, etc.
- New credit: credit score enquiries and new credit applications
- Length of credit history: how long each credit account has existed
- Bankruptcy: if applicable
For the FICO score, the category weights are 30, 35, 10, 10, and 15 per cent, respectively.
The credit bureau, Equifax, weighs each category at 30, 35, 15, 10 to 12, and 5 to 7 per cent, respectively.
How can I check my credit score?
Anyone can access their personal credit score for free through legitimate online providers.
The results can vary since each provider has a preferred agency for computing credit scores. Likewise, their source may not be updated on the requestor’s most recent transactions. It’s best to use different providers for a more accurate score.
Consumers must be aware, however, that providing personal information increases the chance for these to be passed on to the providers’ affiliates for marketing purposes.
How important is credit score for credit applications?
While many credit institutions check their applicants’ credit reports prior to making a decision on an application, the approval process does not only depend on credit scores.
Banks also look at current incomes and financial circumstance to determine whether an applicant would be able to pay their debts. This means people with bad credit ratings may still get approved for a credit product, albeit with higher interest rates or certain additional conditions.
Consumers with good credit scores receive better rates and terms simply because they pose less risk for lenders.
This information has been sourced from myFICO and Equifax.
RELATED ARTICLES
About the author
About the author
Retirement Planning
Retirement living sector calls for planning reforms amid declining construction confidence
The Retirement Living Council (RLC) is urging governments to streamline planning systems to boost housing supply, following a decline in confidence in age-friendly construction activity. Read more
Retirement Planning
New laws to boost women's retirement savings through paid parental leave
The Australian Parliament has passed new legislation that will see superannuation guarantee contributions paid on the Commonwealth Government's Paid Parental Leave (PPL) scheme. Read more
Retirement Planning
Planning systems under scrutiny as Australia's ageing population grows
The Retirement Living Council (RLC) has called for governments to address planning system shortfalls in preparation for Australia's ageing population, following the release of new data from the ...Read more
Retirement Planning
Retirement Living Council calls for focus on seniors' housing as population ages
The Retirement Living Council (RLC) has urged governments across Australia to prioritise age-friendly housing solutions in response to new data revealing an ageing population. Read more
Retirement Planning
Macquarie University study reveals benefits of guaranteed income in retirement
A new study by Macquarie University's School of Psychological Sciences has found that mental health, enjoyment, and financial security are key benefits of incorporating guaranteed income and annuities ...Read more
Retirement Planning
Retirement villages offer affordable housing amid market crisis, study finds
Retirement villages are providing a significantly more affordable housing option for older Australians compared to the traditional property market, according to new data released today. Read more
Retirement Planning
Age-appropriate housing could reduce hospitalisations for elderly Australians, report finds
A new report from the Australian Institute of Health and Welfare (AIHW) has highlighted the potential benefits of age-friendly housing in reducing hospitalisations among older Australians. Read more
Retirement Planning
Retirement Living Council urges focus on seniors' housing as population ages
The Retirement Living Council (RLC) has called for a renewed focus on retirement villages as a key housing solution to cater for Australia's ageing population, following the release of fresh ...Read more
Retirement Planning
Retirement living sector calls for planning reforms amid declining construction confidence
The Retirement Living Council (RLC) is urging governments to streamline planning systems to boost housing supply, following a decline in confidence in age-friendly construction activity. Read more
Retirement Planning
New laws to boost women's retirement savings through paid parental leave
The Australian Parliament has passed new legislation that will see superannuation guarantee contributions paid on the Commonwealth Government's Paid Parental Leave (PPL) scheme. Read more
Retirement Planning
Planning systems under scrutiny as Australia's ageing population grows
The Retirement Living Council (RLC) has called for governments to address planning system shortfalls in preparation for Australia's ageing population, following the release of new data from the ...Read more
Retirement Planning
Retirement Living Council calls for focus on seniors' housing as population ages
The Retirement Living Council (RLC) has urged governments across Australia to prioritise age-friendly housing solutions in response to new data revealing an ageing population. Read more
Retirement Planning
Macquarie University study reveals benefits of guaranteed income in retirement
A new study by Macquarie University's School of Psychological Sciences has found that mental health, enjoyment, and financial security are key benefits of incorporating guaranteed income and annuities ...Read more
Retirement Planning
Retirement villages offer affordable housing amid market crisis, study finds
Retirement villages are providing a significantly more affordable housing option for older Australians compared to the traditional property market, according to new data released today. Read more
Retirement Planning
Age-appropriate housing could reduce hospitalisations for elderly Australians, report finds
A new report from the Australian Institute of Health and Welfare (AIHW) has highlighted the potential benefits of age-friendly housing in reducing hospitalisations among older Australians. Read more
Retirement Planning
Retirement Living Council urges focus on seniors' housing as population ages
The Retirement Living Council (RLC) has called for a renewed focus on retirement villages as a key housing solution to cater for Australia's ageing population, following the release of fresh ...Read more
