What is a Credit Report and how will impact my ability to get a loan?

There's a lot of mystery around credit reports and credit scores so this discussion is based upon my opinions formed from my experiences with individual Credit Reports and Credit Scores. They're a complex concept and they sit somewhere up in the clouds with most people having no idea about their personal credit file. Note: companies have their own Credit reports so if have any business relationships it might be wise to check them out separately. Every situation is difference so I've tried to give some food for thought and tips to potentially improve your Credit Report.

Nearly all of us have a Credit Report (sometimes called a credit file) detailing our credit activity for the past 5 years or, for more serious factors, it can be longer. A Credit Report will detail:

• Your identity

• Residential address history

• Credit Score

• Credit Enquiries

• Credit accounts (both open and closed)

• Defaults (when you have not paid a bill and the debt collectors are called in)

• Repayment history - Repayment history for the most recent 24 months for each credit facility you have had, either open or closed.

• Business Relationships - Current and Past Directorships

• Disqualified directorships

Credit Enquiries

When you're speaking with your friendly car sales manager about a new car, or your local bank manager about home loan finance, they will generally run a credit enquiry/check on you. Ask them not to run a credit check until you have researched your options, keep the initial conversation around income and expenses. This enquiry will then be listed on your credit report for 5 years so try an limit them where possible. A couple of enquiries are OK but too many enquiries can bring your score down. If you are considering applying for a home loan many banks don't like to see a long list of credit enquires and in turn, a low credit score. Types of enquiries you may see on your Credit Report might include:

• Home Loans

• Car Loans

• Credit Cards

• Personal Loans

• Store Cards i.e. Harvey Norman interest free (this actually may appear as a credit card in the background)

• ZipPay

• After Pay

• Utilities

• Debt Collectors

What is a Good credit score?

Most banks use Equifax's system so I've based these score ranges from their comments online as well as my conversations with banks. Did you know every Australian is entitled to 1 free credit report per year, this won't impact your credit report, you can access your free individual copy here: Equifax Credit Report

• Credit Reports and Credit Score are two different things. The Credit Report details all your activity and credit history - i.e. the raw data.

• The Credit score is a calculation is based upon your credit activity information.

If you access your Credit Report from Equifax and it doesn't have your credit score, there's many providers online that will allow you to access your Credit Score for free. Look for the words "Soft Touch", this means if you access your Credit Report or Score it does not register on your Credit Report.

Now a good score depends on the scoring model used, every bank has their own unique way of assessing a credit score, and there are literally hundreds if not thousands of variables taken into calculation. So this is a rough guide only on how banks might assess your credit character for a loan application.

579 & below Poor: You will find it difficult to qualify for loans and vulnerable to bad deals

580 to 669 Fair: You may find it difficult to qualify for favourable loan terms

670 to 730 Good to Average: Most banks may consider if there are no other issues.

740 to 799 Very Good: Unlikely to present any application issues with most banks.

800 + Excellent: Will not result in any credit scoring issues

Note: this is subject to no other negative attributes on your report such adverse history, missed repayments, defaults, or other red flags/issues.

Case Study 1 Credit Enquiry Flurry

Below is an example of an Individual Credit Report with a high number of credit enquiries,

As a result of this individual's high number of enquiries the credit score was in the Poor to Average range, meaning limited lending options, higher interest rates, higher repayments and so on and more bad news. You will notice the dates go back 5 years, so the enquiries made in Mar 2016 will drop off the credit report in April 2021, this should improve the overall score if no other activity has occurred. This customers goal was to purchase their first home. I worked together with the couple to map out a plan to improve their Credit Report and time the loan application for when the probability of success was in our favour. The good news is they were able to have some items removed from their Credit Report which improved their score, the loan was approved, and they were able to purchase their first home! It took us around 12 months but we stuck to the plan and achieved a great outcome together. More on improving Credit Reports later...

What impacts my Credit Score and Credit Report?

Major elements to impact your score both positively and negatively:

• Repayment history

• Total amount of debt

• Age of credit enquirers/accounts

• Mix of credit cards or instalment repayments

• New credit enquires i.e. how many recent enquiries

Specific examples may include...

• Reporting errors - Banks and lenders often get it wrong. Investigate any issues.

• Debt collectors - unpaid Parking Tickets, utilities bills, child support, gym memberships, direct debits, subscriptions can all result in the debt collectors knocking on your credit report.

• Moving residence a lot - some banks aren't keen on seeing this.

• Loan repayments

  • Home loans

  • Credit Cards

  • Store Cards i.e. Harvey Norman and other "interest free" arrangements

  • Personal Loans

  • Car Finance

  • Overdrafts

  • Student Loans

  • Bankruptcy

  • Business going into administration

Oddly enough, not having any credit history can result in a low score. Lets say you had only ever opened one credit facility. If you paid it off and closed down the account this can result in a minor reduction to your credit score as you no longer have an active "Mix of Credit" - again Credit Reports are a complicated mystery. This can give the impression that you're damned if you do and damned if you don't so, as a rule of thumb, try to be responsible by limiting your enquiries and making those repayments on time!

Accounts and Repayment History

A Credit Report will display repayment history for the most recent 24 months for each of your credit accounts either open or closed. Here is a guiding legend for repayment history reporting on a Credit Report.

Repayment History Legend

0 - Payment On time - This is what you want to see each and every month!

1 - Up to 29 Days Overdue

2- 30-59 Days Overdue

3 - 70-89 Days Overdue

4 - 90-119 Days Overdue

5 - 120-149 Days Overdue

6 - 150-179 Days Overdue

X - 180+ Days Overdue

R - Payment not reported - potentially a small issue the bank did not report.

P - Pending Reporting, usually seen for the most recent month or two

C - Account Closed

Case Study 2 Bank Overdraft Overlooked

In this example, 24 months repayment history on a credit report this individual had an issue between Jan and Oct 2020 resulting from a small negative balance in an overdraft account.

If repayments are made on time "0" will be displayed under each month. The "2" in Jan 2020 means payment was overdue for 30-59 days so the issue likely started around Nov 2020 and will now stay on the credit report, potentially impacting the credit file until Nov 2022.

This individual was unaware of the outstanding debt, but banks expect you to be accountable and make minimum repayment regardless of how small the amount is. An "X" is a big problem, and it needs attention.

Fortunately, in this case the individual had a score in the Excellent range so although not all banks would consider an application, there are still a couple of decent lenders that don't take missed repayments into account, so long as there are no defaults and everything else is OK with the application.

Case Study 3 Credit Card Assumptions

This individual assumed they had repaid their credit card balance to $0.00 in October.

Unawares to the account holder this payment was actually 2 days late, incurring a $30 late payment fee. Because they didn't use their card in the next few months they assumed no repayments were required and that they didn't need to check their account.

Meanwhile, because they actually still owe the $30 late fee, and they haven't made a minimum repayment for 2-3 months, their credit file is chalking up a "1" then a "2" in the next months, and so on we go to until the customer remembers to physically log in and check. This can create an extremely frustrating position....I've also seen this happen when people haven't used their credit card for some time and the lender is charging them an annual fee.

Simple oversights like this can have an enormous impact on your ability to borrow for the next 24 months. I see it with both low and high income earners, everyone with credit accounts are susceptible to this.

If you're considering borrowing, with a decent score, some banks can consider missed repayment history of a "1" or a "2" within the past 12 months with a good justification or explanation, the next tier down might not look at the repayment history but you've instantly limited your options. But then, if there's other issues with your situation, your property or income that doesn't fit the banks policy, these banks may say no and your options will be limited even further.

What precautions can take to manage my Credit Report?

• Review and monitor your bank and card statements regularly - we rarely do this and banks know it. Any fees or charges will be detailed here. Get interested in you money and take responsibility and learn from mistakes. If you keep your head in the sand you'll get bitten on the backside.

• Be mindful when signing application forms, they can trigger a credit check.

• Ask potential lenders not to run a credit enquiry on you until you give the all clear.

• Minimise the amount of credit accounts to a manageable number, or none at all.

• Direct debit minimum monthly repayment obligations where possible.

• Always have a cash buffer in the accounts being direct debited.

• Set a monthly calendar reminder to check in on ALL your accounts - great exercise to keep you on top of your finances. Never assume.

• Don't go below $0.00 balance on any bank accounts - Set the buffers!

• Don't exceed your limits i.e. credit cards. Limit credit spending, pay cash.

• Don't pay debt collectors directly if you can avoid it. Pay the person you owe even if its in the hands of the collectors where possible.

• Take action and deal with any defaults or issues, don't leave them unresolved.

• Don't use credit! Save yourself the bloody headaches

All credit does is allow us to spend more than we have. Why would you want to be constantly in debt to some one else? AND actually pay more for the item just for the 'privilege' of having it now when you can actually do the same thing with a debit card? My personal preference is not to use credit at all. If you need to borrow you can't afford it and you're living above your means. Save up and pay cash, for example a $600 per month car repayment for 3-7 years is a huge burden to carry over a large portion of your life. Ongoing repayments will significantly impact your weekly cash flow and your borrowing capacity if you one day want a home loan.

What can I do to repair my credit file?

Speak to your lender and request they remove the reporting. Banks are reluctant to do this unless its a result of their error and you will need evidence to prove this. Keep statements, notes, dates and names of phone conversations, and all email correspondence with lenders.

Case Study 4 Credit Reporting Nightmare

I have seen a customer have 6 months worth of negative repayment history removed by a major bank, after a long and painful battle mind you. The customer had logged into their internet banking and updated their home loan repayment frequency from monthly to fortnightly with the good intentions of making extra repayments (monthly is 12 repayments per year, fortnightly is 26 meaning an extra repayment per year btw, 26 ÷ 2 = 13) They received an automated message in their online banking stating:

• You have now updated repayment frequency from monthly to fortnightly

• Your new repayments are $XXXX per fortnight

• Your first payment will be automatically debited on date XX/XX/2020 and each fortnight thereafter.

Problem is the first repayment didn't go through due to a bank system error. This caused a butterfly effect whereby the customer was coming up short every other fortnight. The bank arrogantly refused to admit error and, insultingly, offered to waive their $395 annual package fee for 12 months. The customer was furious, this had prevented their ability to borrow at the time they were ready. We spent hours digging into statements and emails, eventually discovering it was the bank's error. When presented with the evidence the red faced bank manager bent over backwards to remedy the issue. The reporting data was eventually repaired but this delayed the customers plans to purchase a property by 6 months. The property market had moved upwards significantly during this time so the disadvantage of this was that they would need to spend more to buy the same property. The good news...Credit Report was totally cleaned up, the customer secured one of the best loan deals on the market to suit their needs, if not the best. Again we made a plan, stuck to the steps and timed our application perfectly. I spoke with the customer this week and they couldn't be happier with the outcome. And the final cherry on top, they received a few thousand dollars in compensation (winning!) - presented as a peace offering but likely to avoid a larger penalty from an external complaint body.

If the lender doesn't agree to amend the credit reporting you can do two things...

1. Make a complaint to the complaints authority know as AFCA

• You must have made attempts to resolve the issue directly with the lender before AFCA will consider a compliant. This must also be to the banks relevant complaints department. Non negotiable.

• If successful you can make a claim against the lender for both direct and indirect financial loss.

• The complaint process exposes the lender to a fee from AFCA so sometimes the lender may compromise to avoid the time and resource costs incurred by addressing a complaint.

2. Pay a company to clean up your credit history

• There are companies out there that specialise in cleaning up your credit report for a fee.

• There's a strict process involved in reporting negative data on an individuals credit report and if any errors were made in the reporting process these guys will generally find it.

• Typical Fees may include:

  • ~$350 upfront to take on the job which is non-refundable

  • ~$400-$500 for each item removed from your credit file, non payable if they're unsuccessful in having the item removed.

Summary

Credit Reports are an important aspect of the a lenders assessment process so its important to try your best to keep it clean. If you do have Credit Report issues it's not the end of the world, there may be options available to you, just perhaps not the most competitive on the market. Keep your accounts clean and up to date try reducing consumer debt where you can, start paying off the lowest debt first then tackle the next one to gradually increase cash flow. Make a plan to improve your position and options for the future, planning is actually easy and it works.

If you have equity in a property, and a good capacity to borrow, there are options to consolidate debt by refinancing. this may provide some relief in monthly repayment obligations and increase cash flow. Firstly this is a good opportunity to reset and focus on debt reduction, and secondly a good step in the right direction to building wealth.

If you have a credit report issue investigate immediately and take steps to rectify the problem. Life admin is easy to ignore and put on the backburner but inaction, stress, worry, or anxiety have never solved a problem. So take action no matter the size of the problem. Get it sorted and put it behind you so you can look forward to a happy future!