Credit Files Explained

No one is taught about credit and finance at school. Then all of a sudden you're 18, getting a job, and handed access to a whole world of credit, with no education behind you. That's a recipe for danger. So let's break down how credit files actually work.

When your file is created

Your credit file is created the very first time you apply for something. It doesn't magically appear when you come of age. It's generated the first time you get a phone plan, an electricity account, or a loan. From that point on, it's a running record of your credit behaviour.

Let's break down what's on there, and what it all means.

Your score

On Equifax your score is out of 1200. On Experian and illion it's out of 1000. Same idea, different scales.

Here's a common misconception. Your score does not start at 0, and you don't need to go and get a bunch of loans or credit cards and pay them off to build it up. The best piece of advice I personally live by is that often the best thing to do is nothing at all. Your score starts somewhere in the middle, usually the lower to middle end. From there it either grows or falls depending on what you do. You don't have to chase credit to prove yourself.

Enquiries

An enquiry is recorded whenever you've applied for something in your name on credit. That means loans, credit cards, phone plans, power and gas, buy now pay later accounts, and so on. Importantly, an enquiry does not say whether you were approved or declined. It simply records that you applied.

These act as a record for future lenders to see your behaviour over the last five years. As a general rule of thumb, keeping your enquiries below five a year is a good benchmark. It also depends on what you apply for and how often. Going out and applying for five credit cards in a week to see which gives the best deal will drop your score, because to a lender it looks like you're desperate for credit.

Repayment history information (RHI)

This is the month by month record of whether you made your repayments on time, and it's one of the most important parts of your file. A few things worth knowing. You're marked as late if you pay more than 14 days after the due date. RHI stays on your file for two years. And only licensed lenders, like banks and finance companies, can record your repayment history. Your phone and power companies can't. So a run of on-time loan and credit card repayments builds a strong story, while missed ones do the opposite.

Defaults

A default is a record that a debt wasn't paid, the debt can be anything that you've applied for (personal loans, credit cards, phone plans, utilities, etc). But it can't be listed the moment you fall behind. A lender can only list a default when the payment is at least 60 days overdue, the amount owing is $150 or more, and they've sent you the required notices first. Once it's listed, a default stays on your file for five years. And here's the part that catches people out: paying it does not remove it. Once paid, it can be marked as paid or settled, which looks better, but the default itself stays for the full five years.

Judgements

If a creditor or a business takes you to court over an unpaid debt and wins, a court judgement can be recorded on your file. Some judgements can be from creditors, school fees, unpaid rates or outstanding invoices for works completed. Like a default, a judgement stays for five years, and paying the debt doesn't automatically wipe it. There are ways to have a judgement set aside, but they involve the courts, so this is one to get proper advice on. Check out our blog post here for further information.

Part 9 debt agreements

A Part 9 debt agreement is a formal way to settle most of your debts without going bankrupt. Your creditors agree to accept an amount you can afford, paid over time. It sounds like a soft option, but it's a serious one. It's administered by the Australian Financial Security Authority (AFSA), it shows on your credit file for five years (sometimes longer), and it's recorded on a public register called the National Personal Insolvency Index. It also counts as an act of bankruptcy, which can follow you around. This is exactly the kind of thing we help clients avoid where we can.

Bankruptcy

Bankruptcy is the formal process of being declared unable to pay your debts. You are actively bankrupt for 3 years and 1 day, then you are discharged. The mark stays on your credit file for five years and your name goes on the National Personal Insolvency Index permanently. There are also real restrictions while you're bankrupt, like needing permission to travel overseas and limits on running a company. It's a last resort, not a reset button.

Companies and directorships

Your file can also show whether you are, or have been, a director of a company. Lenders look at this because business debts and personal guarantees can affect your own position, even if the debt is technically the company's. If you run a business, it's worth knowing that your personal file and your business dealings aren't always as separate as you'd think.

The bottom line

Your credit file isn't out to get you. It's just a record of your behaviour over time, and once you understand what's on it, you can take control of it. Most of the panic we see comes from not knowing how it works. 

If you want a hand reading your file, working out what's holding you back, or fixing something that shouldn't be there, that's exactly what we do. Perfect Score combines credit assistance with real financial education, and we're partnered with Ausloans Finance Group and Drive Approved to help you get finance-ready. Book a free, no-obligation assessment.

Sources and further reading

• OAIC: Information on your credit report
• Moneysmart: Credit scores and credit reports
• AFSA: I can't pay my debts

General advice warning: This article is general information only. It doesn't take your personal circumstances, objectives or needs into account, so consider your own situation and seek professional advice before making financial decisions. Perfect Score Pty Ltd | Australian Credit Licence 562270 | AFCA member.