How bad is the new credit scoring?
12 March hardly sounds like a key date in history. But, for those looking to get a loan, 12 March 2014 could be a key date that determines whether or not this happens and this is due to significant changes in how credit scoring works.
The most important step in understanding these changes is to first look at what credit scoring is because I know that it has caused some problems with clients from time to time.
In “simple terms”, credit scoring is a mathematical formula that uses complex algorithms to assess a loan application against that person’s score card that is based on a huge range of historical data.
The significance of this is huge and with some lenders is the first criteria applied in deciding whether to even consider a loan application. With others, they will take the credit score into consideration but will still assess the deal in its own right notwithstanding the credit score so straight away, you can see that your credit score is the be all and end all with some lenders but not others and knowing which lender does what is simply not possible for a layman to know. 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.
You can access your credit reports from both Veda and Dun and Bradstreet and, at the time of writing this article, you can either pay to get them quickly or wait 10 days and get them for free. You may have to spend some time on the websites finding how to get them for free as it is not always obvious. The option to pay for your report is there but dig around and you will find the free option.
A credit score is made up of a number of factors:
- Credit defaults, judgements and overdue credit accounts
- Credit arrears
- Amount of credit activity – particularly in the 12 months prior to the current credit application (which includes credit cards, car loans, mobile phone accounts etc.) but may also consider credit history over the last 3 – 5 years
- Employment stability – changing jobs in the last 12 months may affect your score
- Residence stability – changing address in the last 12 months may affect your score
- Previous account history
What’s significant is that if you apply for credit and it is declined due to your credit score, this will appear on your credit history as declined and will make your score even worse.
Your credit score will auto repair to a certain extent after 12 months providing that you maintain stability of employment and residence and limit the number of enquiries made.
Until now, many late payments never made it to a person’s credit file but this will no longer be the case and every time someone misses their payment by more than five days, their credit file is given a black mark and their credit rating gets worse.
You will also have to ensure that all credit cards are disclosed as all open accounts will now show and failure to disclose will mean instant decline of your loan with some lenders.
The current system is less comprehensive; simply registering things like the number of credit enquiries someone has made and whether or not they have any defaults. But, in addition to these, under the new system individuals will have an incentive to manage their reputation – loan applicants get green lights for positive factors such as how often they have made repayments on time.
Here are some of the things that banks will know from the new credit checks.
- 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
Dos and Dont’s to Get a Good Credit Rating Under the New System
- Set up automatic debits to pay your credit card and loans on time
- Close any credit facilities you don’t need
- Check your credit file http://www.mycreditfile.com.au/
- Pay a debt more than five days late
- Shop around for credit cards and store cards when you don’t need them
- Fail to contact the lender to renegotiate your repayment terms
Special thanks to Accredited Broker and Homeloans for providing much of the information in this story and remember, using a broker such as Gold Coast Mortgage Broker FinancialPlus will limit unnecessary applications which will help your score.