In a recent report, Equifax revealed that Australia's national average credit score has remained “excellent” despite the nation experiencing a year of economic challenges.
This is largely attributed to Australians utilising savings accumulated during the COVID-19 period to manage their finances.
The Equifax Australian Credit Scorecard 2023 analysed over two million credit scores to provide insights into the credit habits and scores of Australian consumers. The findings indicate that the national average credit score has slightly improved from 846 last year to 855 this year.
According to Carrie Cheung (pictured above), head of insights at Equifax, the high savings ratio observed during the COVID-19 pandemic has played a crucial role in maintaining credit scores.
The ABS household saving ratio reached a peak of 23.6% in June 2020 and has been gradually declining since then, reaching a low of 3.2% in 2023.
“Using savings to manage the higher cash rates and increased cost of living has helped cushion many Australian consumers against recent economic turbulence and has had a beneficial effect on their credit scores,” Cheung said.
“But this cushion is shrinking rapidly and has already been exhausted for some.”
Missed mortgage repayments rise
A concerning trend highlighted in the report is the growing number of individuals falling behind on credit repayments, including mortgages.
Missed repayments are rising across all age groups, and those who struggle to make timely payments are more likely to have credit scores below the national average.
While a lower credit score doesn't necessarily indicate immediate financial distress, Cheung emphasised the importance of proactive action.
“If consumers are struggling to make ends meet, they should speak to their lender and come to an arrangement before they miss repayments,” Cheung said.
“This approach is better for their credit scores in the long run, and will ensure that any financial stress consumers are going through now won’t impact them down the road, when they might need to apply for credit again for another big life moment.”
Other credit score trends in the Equifax report
In the face of economic headwinds, Australians have been searching for better deals to help combat the impact of rising interest rates and household budget pressures.
Below are some of the latest trends as shown within the Equifax report.
Refinancing activity increases
Australians are increasingly looking to refinance their mortgages in an effort to save money and combat the impact of rising interest rates.
This is reflected in the fact that 38% of mortgage enquiries in August were from consumers looking to refinance, compared to 26% of all enquiries in 2019.
Borrowers who applied for refinancing have a higher average credit score than those who enquired about new mortgage applications (949 and 827, respectively).
The average score for refinance applications has also increased compared to pre-pandemic levels, with the younger age band (18-30 years old) seeing the biggest improvement, from 879 in 2019 to 931 in 2023.
The 31-40 bracket, which makes up the highest proportion of refinance applications, experienced an increase in average credit scores from 906 in 2019 to 951 in 2023.
“Banks have been working closely with customers to help them manage their repayments while also implementing tighter serviceability criteria when granting loans, to ensure consumers will be able to make ends meet in the current economic scenario,” Cheung said.
Buy now, pay later usage declines, consumer liabilities increase
The use of Buy Now, Pay Later (BNPL) services has declined, as consumers become more cautious about their spending habits.
The average score of the consumers applying for BNPL fell from 694 in 2021 to 582 in 2023. Most BNPL applications were made by consumers in the 18-30 age group in the past year, with an average score of 541 – a decrease from 632 in 2021.
Equifax also observed that as economic conditions tightened, the proportion of consumer liability payments (mortgage, rent, credit card payment and loans) has increased dramatically.
“This increase in consumer spending on liabilities is likely connected to rising interest rates,” said Cheung. “The repayments have grown tangibly, and consumers, as a result, have had to shift their spending habits to prioritise paying back debts.”
Mortgage (+ 21.41%), rent (+14.87%) and loan (+22.63%) payments increased significantly in Q2 of this year, when compared to the start of 2022.
“However, payments on credit cards only saw a very small uplift (+3.54%), indicating that some Australians have started cutting back on unsecured credit and prioritising secured credit debt instead,” Cheung said.
Advice about protecting credit scores
With savings dwindling and conditions turbulent, consumers should take steps to maintain the long-term health of their credit scores, according to Cheung.
“We know this has been a tough year for Australians, but they have persevered,” Cheung said.
“Now is the time for consumers to take action and ensure they are looking after the long-term health of their credit scores. Small things like paying bills on time and limiting the amount of short-term loans are all things that have a positive impact.”
Other ways to build and protect your credit score include:
- Check your credit score regularly
- Closing unnecessary accounts
- Reaching out to your lender if you’re worried about falling behind on payments
- Continue to pay bills, credit cards, loans and rent on time and build a rainy-day fund in case of unexpected events
- Be aware of the number of credit applications you make
What do you think of Equifax’s report? Comment below.