How to Improve Your Credit Score Before Applying for a Loan

Your credit score is one of the most influential factors in determining whether you'll be approved for a personal loan and what interest rate you'll pay. In Australia's competitive lending market, the difference between a good and excellent credit score can mean thousands of dollars in savings over the life of a loan. If you're planning to apply for a personal loan, taking time to improve your credit score beforehand is one of the smartest financial moves you can make.

Understanding Credit Scores in Australia

In Australia, credit scores typically range from 0 to 1,200, depending on the credit reporting agency. The three main agencies—Equifax, Experian, and illion—each use slightly different scoring models, but generally, scores are categorised as:

Below 500: Below average. You may struggle to get loan approval, and if approved, you'll likely face high interest rates.

500-699: Average to fair. You should be able to get approved for most loans, though not necessarily at the best rates.

700-799: Good. You're likely to be approved for most credit products and receive competitive rates.

800-899: Very good. You'll have access to the best rates most lenders offer.

900+: Excellent. You're in the best position to negotiate rates and will be approved for virtually any credit product.

Under Australia's comprehensive credit reporting system, your credit file contains both positive and negative information about your credit history. This includes your repayment history on existing accounts, the types of credit you have, the number of credit applications you've made, and any defaults or serious credit infringements.

Check Your Credit Report for Errors

Before anything else, obtain a free copy of your credit report from each of the three credit reporting agencies. Under Australian law, you're entitled to a free report once every three months, or immediately if you've been declined credit.

Review your reports carefully for any errors. Common mistakes include:

• Incorrect personal information (name misspellings, wrong addresses)
• Accounts that don't belong to you
• Duplicate listings of the same debt
• Incorrect payment history (payments marked late when they weren't)
• Closed accounts showing as open
• Outdated negative information that should have been removed

If you find errors, dispute them directly with the credit reporting agency. They're required to investigate and correct any inaccuracies. This simple step can sometimes result in immediate improvements to your score.

Pay All Bills on Time

Your payment history is the single most important factor in your credit score. Under comprehensive credit reporting, every on-time payment on credit accounts like loans and credit cards is recorded and positively impacts your score.

Set up automatic payments or direct debits for all your bills to ensure you never miss a due date. Even one late payment can stay on your credit file for two years and significantly drag down your score. If you've already missed payments, focus on getting current and staying current—your score will gradually improve as you build a positive payment history.

While utility bills and rent payments aren't typically reported to credit agencies, some services now allow you to have these payments added to your credit file, which can help build your credit history if you have limited credit accounts.

Reduce Your Credit Card Balances

Credit utilisation—the percentage of your available credit that you're using—significantly impacts your score. High utilisation suggests you might be overextended and at greater risk of default.

Aim to keep your credit card balances below 30% of your credit limits, and ideally below 10% for the best impact. If you have a $10,000 credit limit, try to keep the balance under $3,000, or better yet, under $1,000.

There are several strategies to reduce utilisation: pay down existing balances, request a credit limit increase (but only if you won't be tempted to spend more), or spread purchases across multiple cards to keep individual utilisation lower.

Limit New Credit Applications

Every time you apply for credit, a hard enquiry is recorded on your credit file. Multiple enquiries in a short period can signal to lenders that you're desperate for credit or taking on too much debt, which negatively affects your score.

In the months leading up to a significant loan application, avoid applying for any new credit cards, store cards, or other loans. If you're comparison shopping for a personal loan, try to complete all applications within a two-week period—credit scoring models typically treat multiple loan enquiries within a short window as a single enquiry for scoring purposes.

Also, be wary of offers for "instant approval" credit. These often trigger hard enquiries even if you're just checking eligibility.

Don't Close Old Credit Accounts

The length of your credit history matters. Older accounts demonstrate a longer track record of managing credit responsibly. Closing your oldest credit card might seem like a good idea if you're not using it, but it could actually hurt your score by reducing the average age of your accounts.

If you have old credit cards you don't use, consider keeping them open but locked away. Use them occasionally for small purchases that you pay off immediately to keep the accounts active and maintain your credit history length.

Diversify Your Credit Mix

Lenders like to see that you can manage different types of credit responsibly. A healthy credit mix might include a credit card, a car loan, and a personal loan. Having only one type of credit can slightly limit your score potential.

That said, don't take on new credit just to diversify. This strategy should only be considered if you genuinely need a new type of credit and can manage it responsibly.

How Long Does It Take to Improve Your Credit Score?

Credit score improvement isn't instantaneous. Depending on your starting point and what steps you take, you might see meaningful improvement within three to six months. However, more significant improvements often take 12 months or longer.

If you have serious negative marks like defaults or bankruptcies, these can remain on your file for five to seven years. While their impact diminishes over time, patience is necessary.

The key is to start early. If you're planning a major loan application, begin working on your credit at least six months in advance. This gives you time to address issues and build positive history.

Calculate What Better Credit Could Save You

A higher credit score translates directly to lower interest rates and real savings. For example, the difference between a 12% and 8% interest rate on a $30,000 personal loan over five years is approximately $3,800 in total interest. Use our personal loan calculator to see how different interest rates affect your repayments and total loan cost.