A number of recent changes to Australian ‘Privacy Legislation’ are in direct relation to Comprehensive Credit Reporting – better known as Positive Credit Scoring. In this article we take a look at the significance of the changes and how they affect us all.
In the most simple terms Positive Credit Scoring is a complex mathematical algorithm designed to assess an individuals finance application relative to their own personal ‘financial score card’. A comprehensive compilation of historical data is used to create each of our ‘credit scores’.
Most lenders will now use Positive Credit Scoring to assess applications for finance. Information provided in an individuals credit report may have an impact on their credit score. Lenders will now be able to compare information in your credit report with the information provided in finance applications. As a result – full disclosure is even more important than ever before.
Anyone (including lenders) can now access a copy of your credit report, enabling them to compare in detail the information you provide with the details on the report.
Comprehensive Credit Reporting
Previously in Australia the Credit Reporting Agencies (such as: Veda and Dunn & Bradstreet) recorded limited detail on borrowings, company directorships, etc, and detailed any defaults or judgements. It was useful to see if someone was potentially a bad credit risk (Negative Credit Reporting), however was not really designed to identify ‘good’ credit risks.
With Comprehensive Credit Reporting, more information is gathered and then analysed to give you a score and ranking. Your score is calculated based on the information held in your credit report at a given point in time. Your score is dynamic and predicts the likelihood of an adverse event, like a default, being recorded on a credit report within the next 12 months.
Your score indicates how you compare to other credit-active Australians in the credit-reporting database. Lenders are likely to use this information as part of their credit assessment process; however, lenders will also use their own criteria and policies when assessing an application, not just your credit score.
Generating Your Credit Score
Day to day actions can have a marked impact on your overall credit score. It’s important to consider some of these more important factors and how they can affect your credit position.
1. Personal Information – certain personal information is taken into account when creating your credit score. Age, length of time employed, time at your current residential address among them – these factors are used to determine risk.
2. Type of credit provider - there may be varying levels of risk associated with approaching a bank, store finance provider, hire purchase and utility companies for credit. Research suggests that there is different levels of risk associated with lenders in particular industries – for example, non-traditional lenders may pose a different level of risk to that of a recognised bank.
3. Size and Type of Credit Sought – Credit limits you may have applied for in the past may have an impact on your credit score. Credit cards, personal loans, mortgages and store based finance options hold different levels of risk.
4. Number of Credit Enquiries – Every application or enquiry you make is added to your credit report, including mortgages, loans and utilities applications. Shopping around for credit may impact negatively on your credit score in a relatively short space of time. The simple process of seeking alternate options can impact greatly on your credit score.
5. Age of Your Credit Report – A relatively new credit file may show a different level of risk to a more established file.
6. Defaults and Court Writs – These can be an indicator of increased risk and negatively impact on your credit score. Files without such judgements can have the opposite effect and generate a more positive score. Until now, many late payments of accounts simply never made it to your personal credit score, this is no longer the case. Every time you default by 5 days or more, your credit file is given a black mark and your credit rating is downgraded.
7. Commercial Address and Title – The length of time you have operated from the same business address is a measure of stability and may have a positive impact on your credit score. If you’re a proprietor or director of a company it’s important to understand the commercial segments of your credit report.
Understanding Your Credit Score
An individuals credit score is provided as both a number and percentage position in relation to other credit active Australians. Scores are reviewed regularly and updated. They may also be adjusted by other factors such as population and general economic changes.
To provide you with a score relative to the rest of the population a ‘risk grade’ is used:
· Below Average (Lowest 20%)
· Average (21% to 40%)
· Good (41% to 60%)
· Very Good (61% to 80%)
· Excellent (81% to 100%)
There are many variables and factors taken into account to produce a ‘credit score’. A ‘good’ score is a relative term as it can only be determined by how the rest of the credit active population is fairing. Where you sit on a percentile basis is probably more important than your actual score at any given point in time as your status fluctuates on the back of many influencing factors.
Should a specific event effect and downgrade your score it will likely self-correct within a 12 to 18 month period – providing you maintain stable employment, limit your applications for finance and continue to reside at the same address.
What Your Lender Now Knows
Here are just a few examples of what the banks will know following the changes to credit scoring and privacy legislation.
· Whether repayments have been made on time over a two-year period.
· If a repayment of over $150 is more than 60 days late, it will be listed as a default.
· The limit on the credit cards for which you have applied.
· The type of card for which you have applied.
· The date you opened a credit account, the type of account, and when it was closed.
· If, because of a default, someone has entered into a new varied arrangement for repayments.
What You Should & Shouldn’t Do!
Here are a few tips to maintain a good credit rating:
· Close any credit facilities you don’t need.
· Set up automatic debits to pay your credit card and loans on time.
· Contact your lender to renegotiate your repayment terms if necessary.
· Check your credit file regularly.
· Don’t pay a debt more than five days late.
· Don’t shop around for credit cards and store cards when you don’t need them.
The significance of the changes to legislation and availability of personal information to lenders is massive. Some lenders will review your credit score to decide whether to even consider an application. Others will take your credit score into consideration but make an assessment on the overall merits and circumstances.
What makes it even more confusing is that some lenders do not credit score but the mortgage insurer that they use does, so even though a loan can be approved by a lender, it can be declined by a mortgage insurer.
Understanding who does what in relation to your personal credit score is important but not always possible for the average person. Using a competent and experienced broker will give you an advantage. If you have questions about credit scoring or finance in general, contact us today – we are always happy to assist.
You will find more information and access to your personal credit reports from both Veda and Dun and Bradstreet.