When it comes to the finance application process, whether for personal or business purposes, your credit file and score are critical. But how do you ensure it’s good, and improve it when it’s not?
Your credit score (or rating) is a number based on your borrowing and repayment history. Previously in Australia, the credit reporting agencies reported on negative credit events, but more recently the system of credit reporting changed to Comprehensive Credit Reporting (CCR), which captures your positive credit conduct as well (such as making your repayments for financial commitments on time).
Think of your credit file (or credit report) as your financial scorecard, recording historical information regarding your credit activities
By 30 September 2018, the ‘Big four’ banks were required to report 50% of their client credit data held to the reporting agencies, and 100% by 30 September 2019. As of May 2021, there were 62 credit providers participating in CCR, as it became mandatory in Australian credit reporting.
In Australia, there are three credit reporting agencies:
- Equifax (formerly VEDA)
Scores between zero and 1,200. The largest credit reporting agency in Australia, Equifax is most commonly used by financiers and utility providers in assessing your credit worthiness. The higher your score, the better the banks interpret your credit worthiness, which equates to you being a lower credit risk, and increases the chances of an approval.
- Illion (formerly Dunn & Bradstreet)
Scores between zero and 1,000. They also provide debt recovery services, and provide a business credit check to ascertain the credit and financial viability of a business.
- Experian Scores
between zero and 1,000. This is perhaps a more data-focused reporting agency that also shares your data with credit providers.
WHAT’S A GOOD SCORE?
This really depends on the reporting agency, but some indicative ranges are pictured in Table 1.
WHAT’S A GOOD CREDIT FILE?
Think of your credit file (or credit report) as your financial scorecard, recording historical information regarding your credit activities. It typically includes things such as a list of your credit accounts (credit cards, loan contracts, etc.), utility and telecommunication company enquiries, as well as whether you’ve made your repayments on time and in full.
You can obtain your own free copy of your Equifax credit file (via www.equifax.com.au or www.experian.com.au) if;
- You’ve not received one in the last three months,
- You’ve been declined in the last 90 days, or
- You’ve had an item corrected on your credit file.
WHY IS IT IMPORTANT?
Increases Your Chances of Finance Approval
A positive credit file (history) will be viewed very favourably by future credit institutions you might apply to. It shows you’re a good payer of your debts, and therefore are a lower risk to them, if they take you on.
Helps with Better Interest Rates
When it comes to things like car loans, banks now use a ‘rate-for-risk’ assessment, where the better (higher) your credit score and file, the lower the perceived risk, and the lower the interest rate you can expect.
Can Help with Employment
Depending on the occupation, many prospective employers are asking for a copy of your credit file. It shows how well you conduct your finances, and can be a reflection on your character and trustworthiness. It can be used to reduce the potential for theft and embezzlement, and reduce liability for negligent hiring.
Can Help Secure a Rental
After your rent-to-income ratio, your credit score is often the second most important factor a property manager considers in reviewing your application.
Can Impact Your Relationships
According to a 2015 survey undertaken by Bankrate, apparently 40% of adults said that knowing someone’s credit score would influence their inclination to date that person… so now you know!
WHAT GOES ON MY CREDIT FILE?
Your Identification Your credit file details your name, date of birth, driver’s license number, residential and employment history (including dates). Consumer Credit Information This captures details of enquiries you’ve made, credit liability accounts (including dates opened and closed), monthly repayment history (good and bad conduct) on loans and credit cards, overdue accounts such as defaults, and public record information such as court judgements, directorships, proprietorship details and personal bankruptcies and insolvencies.
Commercial Credit Information
This includes details of credit enquiries made on you for commercial credit (e.g. mobile phone account or credit card, for business use), as well as any overdue commercial accounts.
WHAT HAS A NEGATIVE IMPACT ON MY FILE AND SCORE?
Canstar, an independent trusted financial comparison site, lists 10 key things to watch for when wanting to maintain a healthy credit score:
- Age of your credit file, and type of credit taken out – a nil (or short) credit history is not viewed favourably by the lenders. Also, a lack of variety (mix) in the types of finance taken can go against you,
- Missing your loan repayments – this is a big one. One reporting agency suggested your credit score could drop by as much as a whopping 22% if you miss just one credit card payment, and 42% if you miss three credit card payments in three months,
- Making too many finance applications – applying to multiple lenders in a short timeframe can lower your score. Lenders (rightly or wrongly) perceive this as you being under financial duress. Each enquiry is recorded on your credit file, and stays there for five years,
- Excessive applications for transfer of balances – this can also signify credit stress, and you may be better off concentrating on paying off one or more credit cards/loans,
- Paying your bills late – your phone and electricity account payment history doesn’t get recorded by the reporting agencies, but if you’re late enough, and they default you, this will be recorded… and that’s a bad black mark on your file,
- Payday Loans – these are short-term personal loans for small amounts of money offered by small non-bank lenders, and are often up to AU$2,000. Unfortunately, rates, fees and charges tend to be higher, and tend not to be viewed favourably by the mainstream lenders. Buy Now, Pay Later lenders on your file will also go against you,
- Failure to update your contact details – all too often clients claim to never have received bills when they changed address (both physical and email). No bill equates to no payment, which in turn results in a default on your file. Make sure you advise all parties you make payments to of your new contact details,
- Court judgements – these will definitely hit your credit file. Lenders will see you as an increased credit risk, and this will also adversely impact your credit score. They sit on your credit file for five years from date of lodgement, as will filing for bankruptcy,
- Errors on your credit file – sometimes we see other parties incorrectly report poor credit conduct on an individual’s file. When this happens, contact the party that lodged the incorrect information, or the credit report agency, and have it corrected promptly, and
- Regularly checking your credit file – you can normally get a free copy of your credit file once a year from one of the three credit reporting agencies. We recommend diarising this for an annual check so it’s not over-looked. This ensures the information held is correct.
SOFT ENQUIRY VS HARD ENQUIRY
When you check your own credit file, or a financial institution offers you pre-approved credit, this is a ‘soft enquiry’ and is not recorded on your credit file. However, when a lender checks your file for credit worthiness (e.g. for a mortgage, car loan or credit card) this is a ‘hard enquiry’, and will be recorded on your file. Be protective of your credit file – you don’t want unnecessary enquiries on there.
TIPS TO REBUILD YOUR CREDIT RATING
Direct Debits for Loan Commitments
If you set up your repayments with automated direct debit payments, you’re less likely to overlook the payment, and get a black mark on your credit file.
Stop Applying for Six Months
Excessive activity (enquiry) on your file will hurt your score – take a break, and let your score start to rebuild (itself).
Automatic Checks on Your Credit File
When you do request a copy of your credit file, you can also request that you be advised of any activity that occurs. That way, you can remedy any incorrect data straight away.
If you are suffering some financial duress, and are struggling to meet your loan/utility/telco commitments, then communicate this with the credit provider. It’s better to come to a financial arrangement to pay things off, than default and have a black mark on your credit file.
Make sure you use a finance broker that is not going to put in multiple applications for finance for you – these all hit your credit file and drag down your score. If you become aware of a negative mark on your file, consider engaging a reputable credit fix solution company to help remedy this (contact Optometry Finance Australia for their preferred partners).
Paul McKinley is the Managing Director and resident Chartered Accountant of Optometry Finance Australia, an independent finance broker that works with optometrists Australia-wide. With over 30 years relevant commercial experience in the finance, automotive and accounting industries, Mr McKinley specialises in commercial funding with a strong focus on personalised client service and retention. Visit optometryfinance.com.au.