What is a credit rating? And why should I care about it (at all)?

People often (well sometimes at least) ask us – when we do our presentations and workshops for members – what a ‘credit rating’ or ‘credit score’ is and why it might be relevant to them. It’s a good question. It’s probably something all Australian adults should have a basic knowledge and understanding of. If you don’t know about this – yet – this article attempts to give you what you need to know quickly and relatively painlessly.

So what is a credit rating or credit score?

Basically, they are a measure or estimation of your credit worthiness; that is, how risky (or not) it is to lend you money or otherwise extend your credit. In Australia, our credit rating is derived from a credit report produced by an accredited credit reporting agency.

Why do we need them?

In the relatively recent past, when we lived in small communities where we knew each other, we were able to accurately assess whether a person was trustworthy or was likely to repay a loan based on our direct knowledge of them or their reputation. Just as you probably still can with a close friend or family member.

As society became more complex this ceased to be possible. Imagine if you were running a bank or a telecommunications company (telco), dealing with potentially millions of customers. How can you tell what risk a particular person poses; and whether or not you should offer them a loan or a phone plan? The answer is their credit rating.

Why should I care about my credit rating?

It is difficult to get by these days and live a modern lifestyle without using credit in some way, shape or form (and usually in many). For example, most people will need to borrow money if they wish to buy a home, car loans and credit cards will both involve credit report checks, even utilities and phone contracts are usually also credit contracts. The bottom line is that – if you do not take care of your credit rating you may find yourself locked out of getting a loan for a home or car; or at the very least find that you are charged more interest, so everything becomes more expensive and difficult for you.

How do I protect or improve my credit rating?

The good news is that essentially all you need to do to achieve a favourable credit rating is to meet your financial obligations on time and in full; in other words pay your bills. Every time you do this it has a positive impact. There is a little more to it than this. For example, applying for, but not taking, multiple loans may be detrimental. But not too much.

How do I check my credit rating or score?

The Australian Securities and Investments Commission (ASIC) MoneySmart website – an excellent reliable source of information on all things personal finance – has all the information you need about getting your credit report (for free). We recommend that you check your credit report from time to time (perhaps every year or two). It is particularly useful, for example, if you are applying for a large loan, so you can see what a potential lender will see. Likewise, if you are concerned that you may have been caught up in a data breach, or have become a victim of identity theft, so you can detect and rectify any nefarious credit activity attempted in your name without your knowledge.

What should I do if I am concerned about my credit rating?

If you think something is wrong or inaccurate in your credit report, it may just be that some incorrect or old information has inadvertently appeared, you can get in touch with the agency directly and ask them to fix it. Be careful about using businesses which tout themselves as doing ‘credit repair’, you probably don’t need to pay for their services because they are not able to do anything that you cannot accomplish yourself. Scammers have also used the offer of fake or questionable ‘credit repair’ or ‘debt solution’ services to target victims.

If you are having trouble with credit or debt, including difficulty meeting your commitments, please read our immediate money help page or contact us for a referral to a financial counsellor. The best thing to do in these circumstances is to take action and seek any help you need promptly.