What is a credit score
A credit score is a number that summarises the information held on your credit report to provide an indication on how likely you are to pay back the money you owe to a credit provider. This is known as your ‘creditworthiness’.
Your credit score is calculated by either the credit reporting body or by the credit provider that you have applied to, using a formula that evaluates how well or badly you pay your bills, how much debt you carry and how all of that stacks up against other borrowers. In effect, it tells you in a single number (typically between 0-1000, or sometimes 0-1200) what your credit report says about your management of existing credit.
Your credit score is designed to show credit providers, by way of a number, the strengths and weaknesses of the information in your credit report.
A credit provider has a choice to either use the credit score calculated by a credit reporting body, or to calculate their own score.
Generally, the higher your score, the better
So if you want to apply for credit to buy a home or car, for example, or to apply for an increase in your credit limit, you can use your credit score as a guide.
A poor or below-average score indicates that you have some work to do to improve your credit risk rating.
It could also indicate that there could be a problem with the information contained in your credit report. It could alert you to the fact that you need to investigate and possibly challenge some of the information contained in your credit report – before you apply for that all important loan.
What’s behind my credit score?
The score is based on information on your credit report. Plus, if the score is calculated by the credit provider, the credit provider may use other information that it knows about you. This could include information from your application form or from other accounts that you hold with the credit provider.
Factors that might influence your credit score include the number and type of credit accounts you hold, whether or not you typically make payments on time and whether or not you have any adverse information on your record such as defaults or judgements. The frequency that you’ve applied for credit, and the type of credit applied for, may also be taken into account.
How are credit scores created?
Credit scores from credit reporting bodies are generally based on credit related and demographic information held by them on your credit history – which may include age and location, type of credit applied for, type of credit provider, overdue debts, the number of enquiries made to credit providers about credit over time, the dollar amount an application was for, public data including court judgments or court writs, defaults including how many, whether they are paid and how recent they are.
Credit providers might calculate a credit score using their own information (like application information and whether or not you are an existing customer), plus information that they get from external sources like a credit reporting body.
In addition to having their own process for calculating a credit score, each credit provider also applies their own criteria and policies when making lending decisions - which is why some credit providers may approve your application while others won’t.
How many credit scores do I have and why are they different?
You may have many different credit scores – because each credit reporting body or credit provider will calculate their own score using their own formulas and information available to them at that time. They may hold different information and potentially assess this in different ways.
Your credit score from a credit provider with whom you have a limited credit relationship could be quite different to your credit score from a credit provider with whom you have many products.
Some other credit providers or businesses may not calculate their own score. Instead they may get the score from the credit reporting body (i.e. the company that keeps your credit report).
Either way, the credit provider or credit reporting body will calculate their own version of the score using their own formulas and information available to them. This means that a score used by one credit provider may be different to that used by another credit provider.
It can also mean that the score created or used by a credit reporting body or credit provider can change over time if the formulas are changed (even if your information hasn’t really changed).