Understanding your credit score

By Katherine Houston

Credit scores are one of those ambiguous but mandatory things in life, much like your superannuation or tax return. You're not quite sure how it works, but you hope for the best anyway.

We’re hoping to clear up some of these questions for you, so we spoke to one of our Heads of Credit Risk, Joav Rav-On, to help talk us all through it, and how we can look good to lenders.

1. What is a credit check and how does Latitude use it?

Conducting a credit check means that we enquire with a credit bureau such as Experian, Equifax or Illion to get an understanding of your credit history. These bureaus act as aggregators of credit information from a wide range of providers (such as banks, energy and phone providers), and this gives us a view as to how often and how much someone has borrowed in the past, and how well these loans and bills have been repaid.

The bureaus supply this information along with a ‘score’ to us, with higher scores representing a stronger customer profile, so you can see how this helps us to make the most appropriate decision when lending.

2. What is a bureau score (also known as a credit score)?

Every credit bureau uses the data that it has available to build their ‘score’ – scores predicting credit risk as a value-added product to credit providers. In some markets these scores are also referred to as a ‘credit rating’.

3. How is a bureau score calculated?

Bureau scores are mathematical models that are built to predict credit risk – or the risk that an individual will not repay their debt. While the exact calculation is proprietary to each bureau, some of the key inputs would be information on how often an individual has applied for loans, whether they’ve been approved and how well they’ve been paying off their debts in the past.

4. Are all bureau scores the same?

No – each bureau builds their score differently and credit scores are not the same across the bureaus, so a ‘Good’ score at one bureau would not necessarily mean the same at another.

5. Where can I check my credit score?

Each of our credit bureau partners have websites that allows individuals to check their own credit scores.

6. If I check my credit score – will it affect my rating?

You’re entitled to know your credit score – accessing it from the bureaus directly or their partners will not affect your credit rating.

7. How can I improve my credit score?

There are a number of things an individual can do to improve their credit score. These include:

  • Paying bills on time
  • If you missed payments – work quickly to get up to date and then stay up to date
  • Take care not to open multiple credit facilities within a short space of time.

I would strongly recommend that you access the www.creditsmart.org.au website for more tips and tricks on how to manage your credit profile to look good to lenders.

8. I’ve already applied for credit, is it too late to improve my credit score?

It is never too late to work on improving your credit score. A credit score is an assessment at a point in time and as new information is added to your credit file the score will get recalculated incorporating this information.

We hope you learnt a thing or two about your credit score. And just remember, even if your score today is not where you want it to be, by exhibiting good credit habits you can rebuild and improve it over time. Great news, right?

Now, that’s enough life admin for today – we’ll give you the night off – you’ve certainly earned it. Tomorrow, you can tackle your tax return.