Why your credit score isn’t perfect
YOU'VE been a responsible borrower your entire life, never missed a bill or made a late repayment, but your credit score still only ranks you slightly above average.
What the heck is wrong with you, you might wonder?
The good news is there's nothing wrong, because perfect credit scores are almost impossible to achieve. And better news is that responsible borrowers are now starting to see a spike higher in their scores as big banks become involved in Australia's new comprehensive credit reporting regimen.
Your credit score is used by lenders when considering loan applications, and some offer lower interest rates to people with high scores. They are compiled by credit agencies such as Experian, Equifax and Illion, and free reports can be obtained directly or through websites including creditsavvy.com.au, getcreditscore.com.au and creditsimple.com.au.
A perfect credit score is either 1000 points or 1200 points, depending on the agency, and lender MoneyPlace's CEO, Stuart Stoyan, said less than 1 per cent of consumers had a perfect score. Credit Savvy has not seen one.
"It's kind of like a unicorn… it doesn't really exist," he said.
A score rated "excellent" - in the top 20 per cent of all scores - could still deliver borrowers the best interest rates.
ANZ this month started sharing comprehensive credit data - both positive and negative repayment histories - which has moved millions of people's credit scores. NAB was already doing it and the other big banks go live later this month.
"It's more important to pay your bills on time. Set up direct debits and reminders because this is now being recorded," Mr Stoyan said.
"If you don't pay your bill for two months but you begin paying on time again, your score will recover over next 12 months, but would take an immediate hit of potentially hundreds of points."
Recent research by Experian found that two-thirds of Australians have never checked their score. The numbers are improving slightly but a majority of consumers don't know that more of their personal financial data is now being shared.
Australian Retail Credit Association general manager Rebecca Murray said credit scores were trending up for the majority of people as more repayment information landed on their credit files.
"I would expect once we have 24 months of ticks people's credit scores would go way up," she said.
"There wasn't enough information before, but now we could see people with good repayment histories continue to get higher scores. People who are struggling will get lower scores."
Ms Murray, who is also a consumer education specialist at creditsmart.org.au, said people could push towards perfection by making all repayments on time, checking their files to make sure there were no errors and close unnecessary loans.
HOW TO CHASE A PERFECT SCORE
• Always pay bills on time.
• Only apply for new loans when you really need it.
• Don't make multiple credit enquiries while shopping around.
• Avoid high-interest payday loans
• Avoid increasing your credit card limit
• Don't apply for multiple credit cards to chase reward points.