If you've ever been on an American personal finance forum or read similar articles, chances are that the concept of credit scores has come up.
Americans are very concerned with their credit scores and rightly so – it takes a lifetime to build up a solid credit score and this can all be taken away with even a simple slip-up like not paying off your credit card in time.
So, how do credit scores work and do they really matter for us in Australia?
Calculating a credit score – why it matters
Credit scores effectively boil down your creditworthiness into a single comparable score that makes it easy for prospective credit providers to assess your default risk.
The average credit score in America usually hovers around the ~680-700 mark, with anything over 680 considered to be a good score.
As you'd expect, most of the sub-standard (i.e. less than 620) scores are in the 40 years of age or younger categories, while outstanding credit scores of 780+ increase as the age of the borrower increases, peaking in the 70+ years of age category.
While credit scores can be used for a number of things, over the course of a lifetime a high credit score could potentially save you thousands of dollars in comparison to an average or below average borrower.
The major savings here will be on mortgage rates, which are inversely related to your credit score, and also on smaller scale credit products such as credit cards and asset financing.
How does the system stack up in Australia?
According to ASIC's MoneySmart website, the major banks and other credit providers will be putting additional information about credit products you hold onto your credit report from September 2018 including the type of credit products held in the last 2 years, usual repayment amount, the frequency of payments and number of defaults.
In Australia, credit scores are calculated based off personal details (i.e. age and location), type of credit providers used (i.e. banks), amount of credit borrowed, number of credit applications and inquiries made, any unpaid or overdue loans or credit and insolvency data.
All of this data spits out a score of 0 to 1,000 or 1,200 (depending on the credit reporting agency) which will then be used by lenders to determine if and on what terms to lend to you.
In Australia, the calculation of the credit score and its relative importance are slightly different to the USA so I wouldn't be worrying about your score just yet.
Provided you pay on time and don't go crazy with your spending then you should be able to get financing at reasonable rates in Australia, and a small line of credit can even boost your score for later in life when you want those big-ticket items like a mortgage.
Having said that, it doesn't take much to see that score suddenly start to slip away and credit to start getting more expensive, so it's important to be on top of your personal finances and make sure you're sweeping your accounts to ensure timely payment on all credit that you might have.
For those who are looking to jump into the share market instead of credit, I'd be taking a look at this buy-rated stock that could take a booming $22 billion by storm in 2019.
