- It makes sense to get to know the new rules of credit and how they affect you
- Your financial life changed in September 2018 (and you never knew)
- Who's using the new credit scoring?
- What determines your new credit score?
- What makes up a persons credit score?
- Why your credit score will differ between lenders and mortgage insurers
- What happens if my loan application is declined due to Credit Scoring?
- Will my credit score be permanent?
- How is a credit score measured?
- What changes your credit score?
- How can you improve your credit score?
- Recognise the 8 new dangers to your credit score
- The end of easy money
The new automated credit scoring is marketed as a positive scoring system where the higher you score the safer you may appear to a funder. The idea is that higher risk clients will pay higher interest rates and lower risk clients will pay lower interest rates.
Caveat. Many industry insiders are yet to be convinced this is the way the new system will be interpreted by the banking system.
From September 2018, the major banks and various credit providers began putting additional information about the credit products we all hold on our individual credit reports. This is intended to give a more complete picture of your credit history.
The new information includes:
- the type of credit products you have held in the last 2 years
- your usual repayment amount, and
- how often you make your repayments and if you make them by the due date.
Most Australian lenders, (including the major banks ) and all Lenders Mortgage Insurers (LMI) use credit scoring. This means if you borrow more than 80% of the value of a property and incur lenders mortgage insurance, you can expect them to look at your new credit score.
Non-bank lenders and other wholesale funders are not currently credit scoring, preferring instead to use a more human approach to understanding why your financial picture is the way it is.
Your new credit score is based on a number of calculations about your past credit activity that many major banks and funders are now using to determine your credit worthiness.
The score is intended to help them decide whether they should (or can) lend you money, how much they will lend you and may even determine the interest rate they will offer you.
This latter concept is known as interest rated to risk and is where a higher interest rate may be charged to a higher risk borrower.
The new credit score is not standardised but can include information about your:
- Credit arrears
- Credit defaults, judgments, and overdue credit accounts
- Credit history – both adverse and positive
- Previous account history in the last 2 years
- Stability of employment – (eg: changing jobs in the last 12 months may affect your score)
- Residence Stability – (eg: changing address in the last 12 months may affect your score)
- Past credit activity – in particular, the number of inquiries for credit made in the 12 months prior to the current credit application. (These will include inquiries about credit cards, car loans and leases, mobile phone accounts, etc.) and can even go back up to 5 years.
Each funder has their own set of scoring standards (called scorecards) and focuses on different issues.
This can be due to their different attitudes towards:
- Avoiding exposure to risk by industry (e.g. mining: where it is a single industry town)
- Avoiding exposure to risk by region or postcode (e.g. Karratha WA 6714)
- Avoiding exposure to risk by age group (e.g. Over 55's with big mortgages and not exit strategy)
- Previous account history across all accounts with a particular lender – no time limits.
- Previous account history across all accounts with lenders owned by the same major brand umbrella (e.g. All these funders are under the same ownership banner: Westpac, St. George Bank, Bank SA, Bank of Melbourne, RAMS)
- Whether all a persons property securities are mortgage insured by the same mortgage insurer (eg: Genworth, QBE etc.)
All credit inquiries will be recorded on a persons credit file and can affect their ability to qualify for credit. For example, a formal decline from one funder may adversely influence a subsequent funder you may approach so its important to work with an adviser who can pre-assess your position, rather than risk 'shopping around for the best deal'.
The new credit score will auto repair to some degree as your employment becomes more stable, as you reduce the inquiries about new credit and as you pay your major utility bills on time.
You can expect the major Utility providers and Telcos to keep your history for up to 5 years from the listing date of any late or missed payment though.
Depending on the particular credit reporting agency used to calculate your score, (there's at least 5 of them) the score will be a number between zero and 1,200 (or zero and 1,000).
- A score between 833 – 1200 is considered Excellent - you're highly unlikely to have any adverse credit events harming your credit score in the next 12 months
- A score between 622 – 725 is considered Good - you're less likely to experience an adverse credit event on your credit report in the next year.
- When a score is Average - you are likely to experience an adverse credit event in the next year.
- When a score is considered Below Average - you are more likely to have an adverse credit event being listed on your credit report in the next year
Your credit score can change even if your financial habits haven't. This could be due to a number of factors including:
- a particular listing on your credit report expiring
- a change to your credit limit on an existing loan or credit account
- new information supplied from a creditor
- new information received about late repayments on a utility bill
Improving your credit rating starts with looking at your current financial situation and looking for ways to improve it by improving your payment habits and reconsidering how you run your financial life.
The government’s SmartMoney website suggests these steps to help improve your credit rating:
- lowering your credit card limits
- consolidating multiple personal loans and/or credit cards
- limiting your applications for credit
- making your repayments on time
- paying your rent and bills on time
- paying your mortgage and other loans on time
- paying your credit card off in full each month
- Multiple Credit Card balance transfers
- Interest-Free purchases (e.g. Afterpay, Certegy)
- More than 4 credit inquiries in the last 12 months
- Pay Day Loan inquiries (e.g. Nimble, Cash Converters)
- Changing jobs in the last 12 months
- Changing residential address in the last 12 months
- Multiple credit inquiries from car dealerships when car shopping M Monthly inquiries from credit card providers (e.g. Amex, Citibank, HSBC)
- Inquiries from online betting agencies (e.g. BetEasy, Ladbrokes, Sportsbet, etc.)
From January 2019 funders and consumers alike now face new laws about issuing credit cards.
Quick facts: In July 2018 ASIC reported Australians owed $45 billion on 21.3 million credit cards. Almost 550,000 credit cards were in arrears with an additional 930,000 in persistent debt and 435,000 account holders only making small repayments. Further 18.5% of consumers were overwhelmed by the amount they owed.
Credit providers are now required to ensure customers can repay their full credit card limit within three years before providing a new credit card contract or increasing the limits on existing credit card contracts.
Up until now, a person usually didn't lose their house due to an unpaid credit card debt; until now
This means many Australians will now be forced to consolidate their large credit card debt before being eligible for a new home loan.
The flow-on effects can include;
- equity is stripped from your home when consolidating credit card debt to a mortgage
- amounts of previously unsecured credit is forced into being held as secured credit, and
- reduced home loan affordability
Many people will be caught unaware of the real impact of the end of easy money.
The rude awakening for many Australians in 2019 will be credit card debt will prevent many consumers applying for a mortgage and will need to be consolidated from credit card debts to personal loans that when repaid, will then allow for a mortgage to be applied for.
The devil is in the detail but in summary, this is the new risk to manage;
- When an unsecured debt like a credit card goes unpaid, there is usually no underlying asset that can be seized by the bank.
- When this same debt is secured by your home and the debt goes unpaid, the underlying asset can be seized by the bank.
Now is not a time to be without your own financial adviser in your corner looking after you and your family.
You can request your credit report (including a free option) from Equifax (formerly known as Veda), the organisation that creates the credit rating score-cards funders use today. To get a free copy of your Equifax credit report, get in touch with them here.
The message is clear - when it comes to keeping your credit score in good order, a more proactive approach is now going to be required.
If you're preparing to seek (or change) your financial position, it's time to take a proactive look at the new Comprehensive Credit Reporting system and how it will affect you.
Contact us today to see if we can help you and your family make better financial decisions, sooner.