Your credit score is an important number used by lenders to determine your creditworthiness. But how is this number calculated and what can you do to ensure your credit file is managed correctly?

Your credit score is calculated and provided by the three main credit reporting agencies in Australia  – Experian, Equifax and Illion. Each of these agencies uses a proprietary formula to calculate your score, but it is based on your credit file maintained by the particular agency.

In other words, the information on your credit file is the basis of your credit score, and fixing your credit file can help you improve your credit score.

What exactly is a credit file and what does it contain?

You could think of your credit file as a record of your financial history with credit and service providers. It generally contains the following information:

  • Your personal details
  • Any individual or joint credit card or loan applications made by you
  • Any loan for which you’ve provided a guarantee
  • Payment defaults and debt agreements

The information in your credit file is used to prepare your credit report, which is provided to various banks, creditors and service providers when you apply for credit. 

You may have noticed a small consent box asking you to allow a creditor or service provider to run a credit check when you apply for new credit or make an application for a utility connection. When you provide your consent, the concerned establishment makes a hard pull on your credit or asks a credit reporting agency to provide them with your credit report, to check your creditworthiness.

The information on your credit file is also used to calculate your credit score, which impacts your eligibility for credit products.

It’s worth noting that the information on your credit file isn’t permanent. Except for your personal details, most of the other information on your credit file has an expiry date of two to seven years. While it doesn’t mean your financial history will get deleted, but it will stop impacting your credit score after a specified period. 

So, if you’ve made financial mistakes in the past, it’s still possible to clear your credit file over time and add more positive information to it through good financial behaviour to increase your credit score.

Why should I keep my credit file clean?

A clean credit file generally indicates good financial behaviour. Having a clean credit file means you’ve not had any payment defaults in the recent past and you’ve been managing your financial obligations decently well.

If your credit file is clean, you’re likely to have a clean credit report and a higher credit score, increasing your chances of getting approved for a financial product. 

How to help you maintain a clean credit file

1. Order your credit report periodically

You can obtain a copy of your credit report for free from each of the credit reporting agencies once in 12 months. As your credit report is prepared on the basis of your credit file, it tells you the state of your credit file at that time. 

You can also check your credit score from time to time to determine if there’s any change in the information on your file. 

2. Check that the information on your file accurate

Once you receive your credit report, review it thoroughly and pay special attention to any missed payments and enquiries. If any of the information seems incorrect, you could either contact the lender or service provider directly or raise your concern with the respective credit reporting agency.

Even though it’s not very common, mistakes can sometimes creep into your credit report and pull your credit score down. Remember to check the spelling of your name and the accuracy of other information, both personal and financial, to avoid any issues. 

3. Take steps to repair your credit

Repairing your credit is possible, but it may be time-consuming. Credit repair is generally a twin process. On the one hand, it may include identifying and correcting any errors on your file. On the other hand, it requires you to demonstrate positive credit behaviour.

Paying all your dues on time, making timely repayments, reducing your credit limits and paying off any debts can increase the positive events on your file, helping to increase your credit score in the process.

How you can avoid tainting your credit file

Being late on your repayments, making multiple credit applications in a short span of time, and borrowing more money than you can afford to repay are some of the things you shouldn’t do to maintain a clean credit file.

However, if you think not applying for credit could help you maintain your credit file in good shape, you may be wrong.

If you’ve never used a credit card or applied for a loan, and you don’t even have a utility connection in your name, it’s possible that credit reporting agencies may not have opened a credit file for you or it contains hardly any information. Using credit responsibly can help you build your credit file, making it possible to access financial products like home loans in future. Therefore, instead of avoiding credit completely, you should focus on better financial planning and use credit products strategically to meet your goals. 

By Vidhu Bajaj,
Hashching Content Writer

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