Credit scoring? It’s a term thrown around so much in this hi-tech age of credit. Lenders now use (and heavily rely on) internal algorithms to assess a borrower’s risk profile. The good ol’ days of a face-to-face meeting with a Banker, followed by a handshake are well and truly behind us. And as part of the assessment, Lenders rely heavily on your Credit score to determine whether they will 1) approve a loan and 2) how much they are prepared to approve. The higher the score, the better as you are likely to get a better interest rate and be able to borrow more from the Lender.
It isn’t just Lenders that utilise the credit score to assess risk – Government agencies, Telcos, Landlords and insurance companies may use it to make decisions.
But what affects your credit score and how is it calculated? We are going to look at some of the main factors that impact the score:
Your credit history, good or bad; directly impacts the score. Any credit performance in the last 7-10 years may have an effect, so it is important to maintain a strong credit history by making payments on time and staying within limits on credit facilities. Since the introduction of Comprehensive Credit reporting more data related to your current loans is captured on your credit report. Lenders can now readily access your current credit conduct as well as your prior conduct.
Bankruptcy or Part IX
If you have been or are currently Bankrupt or Part IX then this will impact your credit score significantly. If you are discharged, the score will still be impacted but will improve with time if you pay your bills and loans when they fall due and avoid a large number of enquiries; especially through payday lenders.
Consistently applying for credit may adversely impact your credit score. It can be common to make enquiries online to find the best finance deal, but you may inadvertently be lodging an enquiry on your credit file each time which will reflect poorly with Lenders, and reduce your scoring.
Paying your bills late
If you pay your bills late and these may include telco bills, shire rates, and utilities; then the creditors can lodge defaults, judgments or even writs on your credit file. This will notify other (potential) creditors that you haven’t paid your bills or loans. Such lodgements on your file will reduce your credit score and increase your overall risk profile.
These types of loans are frowned up on by most Lenders, as they can signify that you are in financial distress. Although this may not be the case, when they appear on your Credit Report, they can restrict the options you have available. So be careful applying for these loans, consult your financial adviser before you do.
Avoid Dealer Finance
Given many finance operators working in a Dealership are unlicensed operators, it is best to avoid using their services. Unlike finance brokers, they are not legally obliged to act in your best interests. Their main goal is to get you approved and driving your car as soon as possible. This may entice them to submit your loan application to multiple lenders. The more credit enquiries on your credit report, the lower the score is likely to be. Engage the services of a finance broker who will research lenders thoroughly prior to submitting your loan application.
In recent years there has been an influx of Buy Now Pay Later players in the market, with Afterpay being the most prominent. These providers allow you to repay your “smaller purchases” over shorter periods of time, and many of them perform a credit check as part of their responsible lending obligations. You may not be aware of this and may have multiple BNPL enquiries on your credit file.
Defaults and Judgments
These type of credit file lodgements are significant and will almost certainly impact your credit score. If you do not repay a loan or bill, then the Creditor will likely issue a default or judgment on your credit file. These can be very impactive on your credit file score. Furthermore, Lenders will likely decline your loan application if these are present on your file. If they have been lodged, you should contact the Creditor to discuss immediately. We discuss the options available to you, in having these removed in our “credit problems” blog.
Your personal details, employment and residential information are all captured on your Credit Report. If this information is not accurate it may impact your credit score. Any conflicted information which may arise from multiple enquiries, could also result in your credit score being impacted.
Monitor your credit report
It is a great idea to regularly monitor your Credit Report to ensure your personal details are accurate. You can receive updates on your Credit Report via Agencies such as Equifax, however monthly subscription fees may apply.
Fix your credit
If you have a poor credit history or a low credit score, then do not despair. There are options available. Firstly, try to rectify any defaults, writs or judgments directly with the Creditor. Do not ignore them, they will not go away and can stay on there for years. If they have been paid then you may want to consider having them removed by an approved, Credit Repair Agency. This can be an expensive option, but it may help clear up your credit file if you are looking to borrow funds to buy a house or a car. If you would like to dispute the lodgements on your credit file, then you should seek legal or financial advice.
The information is intended to be of a general nature only. We do not accept any legal responsibility for any loss incurred because of reliance upon it – please make your own enquiries.
Any advice contained in this document has been prepared without taking into account your particular objectives, financial situation or needs. For that reason, before acting on the advice, you should consider the appropriateness of the advice having regard to your own objectives, financial situation and needs.