How does Credit reporting work?
In the past, Australia operated on a primarily negative reporting system. What that means that on a person’s credit file, is the only information available is personal information which includes any negative financial information such as default, court judgements and enquiries. Now we have Comprehensive Credit Reporting. This now includes payments that are made late and payments that are made on time.
Some people may have bad credit due to repeated missed payments and taking out more debt than they can afford to repay. However, for others, a simple mistake could have affected their credit score greatly. This meant that if you slipped up once this negative behaviour would go on your file without showing all the positive behaviour in your past and stay on your file for two whole years.
Positive reporting is supposed to ensure that all this information is available such as.
• Your last two years of repayment history. It will show both the good and the bad repayments.
• Whether the payment was made on time. If it was, this will increase your score and help your credit file overall.
• The dates credit accounts were open and closed. This shows your borrowing behaviour.
• Different types of credit you have access to (i.e.: payday lenders and short-term finance will not look good on your credit file)
• The name of your credit providers. This can show a pattern of borrowing.
• The current limit on your credit accounts. This enables them to see how well you manage your current credit.
For the banks and credit providers.
• Having access to this information allows them more closely assess the risk of offering a loan to you.
• Knowing your full credit history also allows the lender to tailor the offer you, based on your past habits, this has been promised to us when comprehensive credit reporting was introduced, however this is not happening just yet. So, whether you have a score of 650 or a score of 900 you are offered the same product with most lenders. When comprehensive credit reporting was sold to us, we were told that we would be offered better rates and rewarded for good credit behaviour. We are still waiting for this to happen. Planning not offer finance to an individual who is under financial stress. This can avoid someone over borrowing.
What does this mean for you?
Time to monitor your credit file on a regular basis, don’t borrow too much and ensure your repayments are kept on time. If you cannot make the repayment on time, apply for a hardship arrangement, and make a record of the call and who you spoke with. Follow it up to ensure it has been recorded in their file notes. This can prevent defaults and late payments from showing up on your credit file and sticking around for years. If you stick to the hardship arrangement, it will not end up on your credit file as a late repayment.
How do credit Enquiries affect my credit score?
Firstly, let us take a look at what a credit inquiry is. It is a request put in by a financial intuition or potential lender for credit report information. They can either be authorised agent enquiries or credit application enquiries depending on the situation.
Authorised Agent Enquiries:
These are not included on a credit report history and therefore do not affect your score. They can be made for several reasons. If you are looking into your own credit file, this is marked as a soft inquiry. Brokers can make these enquires to help you find a loan and assess your credit score before making the formal application. You can see who has made an authorised agent enquiry on your ‘file access’ when you access your personal credit file directly from the credit reporting agencies.
Credit application Enquiries:
When you complete a new credit application, the lender can make an enquiry to see your full credit report, including your credit score. This type of enquiry will decrease your credit score depending on the amount of loan and type of product.
Shopping for the right loan is a smart thing to do. We should all shop around to find the best rates on the market at any given time. But if we fall into the trap of applying for multiple loans in a short space of time, it can negatively impact on your credit score in a big way. After being knocked back a few times or even enquiry about the rate with a formal application, you will not be approved for credit eventually because of too many enquires.
All those enquiries you made before taking out a loan have added up and have had an impact on your credit score, even ones that you have not gone ahead with.
Bottom line is be careful what you do with your borrowing, that store card could be the move that gets you declined for something more important.
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