Credit is when you borrow money and pay it back later, most of the time with interest. Credit providers look at your credit history via a credit report and credit score before deciding whether to lend. A higher credit score means the lender considers you less risky.
What are the types of credit?
Consumer credit in Australia encompasses revolving, instalment and open credit, with each of them affecting your credit profile in different ways.
Instalment credit
This involves borrowing a set amount of money repaid in fixed, regular repayments over a set period. A home loan or business loan for capital are good examples.
The bank or lender sets the terms and interest rates. You repay the total amount plus interest in increments until the debt is cleared.
Revolving credit
Revolving credit lets you borrow, repay and reuse a pre-approved credit limit. Interest is charged if the balance isn’t paid in full each month.
A credit card is a basic example of revolving credit. The credit limit resets as you make repayments, so you can keep using the account.
Buy Now, Pay Later
BNPL services let you pay in instalments, usually without interest but with late fees. Be aware that missed payments can still be sent to a credit reporting agency.
What is a credit report?
It’s a record of your credit history. Credit providers use it to decide whether or not to give you credit or lend you money.
Your credit report includes personal details to identify you – name, date of birth, current and previous addresses. It also lists your credit products, repayment history, credit applications, credit enquiries, defaults, and credit infringements.
Different credit reporting agencies hold different information, so you might have a credit report with more than one agency.
What is a credit score?
Your credit score is calculated based on what’s in your credit report. You’ll get a number that tells lenders how likely you are to repay a debt.
Lenders use your credit score to predict the likelihood that you might default. A higher credit score could improve your ability to get finance approval for a home loan, personal loan, or new credit card, and it can even be useful to get lower interest rates.
A lower credit score will negatively impact your ability to get a loan or credit. If you have a low credit score, you could be denied credit entirely. Not all credit reporting agencies include a score in the report itself though.
How do you get a free credit report?
You’re entitled to ask for your credit report free of charge at least quarterly. You can look at your credit score and credit report for free once every three months from each credit reporting agency.
Contact Equifax or Experian, or use an online credit score provider. If you’ve been denied credit, you can request a free credit report to figure out why. Do note that repayment history information covers only the last two years, while defaults stay for five.
What affects your credit score?
Your credit score will change over time as your credit history changes. Credit reporting bodies tend to look at the following when assessing you:
- Repayment history: Paying all bills by the due date has the biggest positive impact.
- Credit utilisation: Ideally keep your balance under 30% of your available credit limit.
- Credit enquiries: Every time you apply for new credit, a credit enquiry is recorded. Multiple hard enquiries in a short period can lower your score.
- Defaults: A default stays on your credit report for five years if the debt is $150 or more and at least 60 days overdue.
- Length of credit history: Keeping old, unused or fee-free credit cards open can have a positive impact on your score.
How do you improve your credit rating?
Pay your bills and debts on time – it’s that simple to improve your credit score. A good idea is to set up automatic payments so you never miss a due date.
Reducing your credit card limit can also positively affect your score. Check your credit report every so often to spot incorrect information dragging it down.
If you’re struggling with your financial situation, ask your lender for a financial hardship arrangement, which can protect your credit score better than a default. Also be aware that getting help from a financial counsellor won’t impact your score.
How do you fix errors on your credit report?
You have the right to get any mistakes on your credit report corrected for free. Contact the credit reporting agency straight away – they are required by law to keep your information accurate and up to date.
If the agency doesn’t respond within 30 days, raise a dispute with an external dispute resolution scheme or the Australian Information Commissioner. Check the eligibility criteria on their website first.
Beware of credit repair companies promising quick fixes for a fee. You can correct your credit report on your own without paying anything.
How does your credit report protect you from fraud?
Monitoring your credit report will help you spot any potential fraud or risks of identity theft. Look for credit applications or credit card details you don’t recognise, as these could mean your identity has already been stolen.
If you have reasonable grounds to believe you’re a victim of fraud, or after a data breach, you can request a ban on your credit report. Notify the agency immediately so they can verify your identity and protect your credit profile.
What are the 5 Cs of credit?
Lenders evaluate five factors when assessing a credit application: Character, Capacity, Capital, Collateral and Conditions. Together they measure your creditworthiness — in other words, your reliability in repaying debts.
Good credit habits will protect your ability to borrow and run your business. And good accounting software will keep your finances on track.
See related terms
What is debit?
What is cash flow?
What is capital?
