There are countless pieces of advice available to people out there, aimed at offering to ‘improve your credit rating’ or ‘fix your credit score’, and they are read by many people hoping to get the best chance of approval for home loans, personal loans or other forms of credit.
What many Australians don’t realise when they read these articles is that many of them are written in countries like the U.S. and U.K., whose credit reporting systems are very different from Australia’s. So the information, whilst good, often doesn’t apply for people in this country.
In fact, many times if Australians follow that information they may actually be hindering their chances of obtaining credit in the current market, not helping it.
So here is some information for people concerned about their credit rating, to have as a reference for what applies in this country.
What exactly is my credit file?
A credit file is made for every person who is credit active in Australia. Veda Advantage, Dun & Bradstreet, Tasmanian Collection Service (if Tasmanian) and new entrant Experian may all hold information on credit active individuals.
A person’s credit file contains their personal information. It also records any credit applications, all loans which are current and also records any adverse listings such as Defaults, Writs, Judgments, Clear-outs or Bankruptcies which are under that person’s name.
It is from this file that creditors make a decision whether or not to lend people money. This information is then available to banks and building societies; finance companies like GE and Avco; mobile phone companies and retail stores like Myer, Harvey Norman and Wow Sight & Sound. These companies are all known as credit providers or creditors.
What many people aren’t aware of is that any creditor may place an adverse listing on a person’s credit file if the account has remained unpaid past 60 days. This includes phone companies, utility companies, and gyms as well as banks, finance companies and stores – and the outstanding amount can be for as little as $100.
A negative credit reporting system
Currently Australian credit reporting system is a ‘negative’ system. This will change as Australia moves towards positive credit reporting, but until then – the rules of the game are very different from many other countries. Only negative data is recorded on a person’s credit file. From this point of view – there is nothing people can do to counter-balance any negative data which is displayed on their credit file. It is either present – or not.
So is there anything I can do to change my bad credit rating?
YES AND NO! There is no ‘score’ as such in Australia. So a person’s credit file is what it is with all adverse listings displayed for creditors to consider, and no amount of ‘positive’ credit information can currently change that. Under Australia’s credit reporting laws these adverse listings have a set time frame they must be listed for. This is 5-7 years depending on the type of listing. Unfortunately most adverse listings guarantee automatic decline on credit approval in the current market. Adverse listings are not removed ahead of time, but a creditor will mark the listing as paid if the account has been settled.
However, if a person’s credit rating contains listings which should not be there, or there are errors, the credit file holder does have the right to have this information rectified.
5 ways to improve your chances of obtaining credit under Australia’s credit reporting system:
1. Reduce credit limits.
Lofty credit limits do not improve a person’s credit ‘rating’. If the loan applicant has a credit limit of say $20,000 on their credit card, the debt amount on that card will be calculated on $20,000 – even if the actual amount the applicant has owing on that card is only $5,000. So a potential borrower should seek to reduce any credit limits on cards or loans they currently hold.
2. Reduce credit enquiries.
Do not shop around for credit. Whenever a person other than the credit file holder makes an enquiry on their credit record – that enquiry is recorded on the person’s credit file. Currently there is no way of seeing on someone’s credit report if the loan was approved or not, only that the application was made. Some lenders are refusing home loan applications due to too many credit enquiries, such as two enquiries within thirty days or six within the year.
3. Check credit file.
Anyone has the right to request a copy of their credit file, to see what is being said about them. This report is free for the credit file holder every 12 months. The request should be made to all the applicable credit reporting agencies, and a report will be made to the credit file holder within 10 working days.
There is the potential for creditors to make mistakes when entering listings on credit files. So anyone who is credit active should check theirs, regardless of how diligent they think they may have been with their repayments.
A small scale study conducted by the Australian Consumer Association (now Choice Magazine) in 2004, revealed a staggering 30% of credit files were likely to contain errors.
“In our view, there are serious, systematic flaws which are leaving an increasing number of Australian consumers vulnerable to defamation, mis-matching and harassment,” the report said.
Adverse listings can sometimes occur due to identity theft; some people are caught in issues over separation from their spouse; some have been disputing the bill which went to default stage and many people are just victims of the fallout from inadequate billing procedures – wrong names, wrong addresses errors with creditor computer systems, and sometimes human error.
Many times people are unaware they have adverse listings on their file until they apply for credit and are refused. Unfortunately at that time it can be stressful, and they can lose the home, or be forced to choose a different loan with a higher interest rate.
4. Pay any outstanding amounts.
If a credit file check reveals outstanding amounts on a person’s credit file, paying them can be of benefit to a person’s credit rating. Whilst the creditor cannot remove the listing, they can mark the listing as paid, which in some cases could improve people’s chances of obtaining credit.
5. Remove errors.
Unfortunately listings are not removed by creditors unless the credit file holder can provide adequate reason and lots of evidence as to why the listing should not be there. Credit repair also requires knowledge of the legislation and perseverance. But for those people whose financial freedom is hindered because their credit file contains errors, it is a point worth fighting for.
If people have neither the time, knowledge or patience for credit repair they can seek out a reputable credit repairer who will be able to work on their behalf to negotiate with creditors to have the defaults removed if there are errors.
A clear credit record can allow potential borrowers the option to choose the best loan to suit them, with the best interest rate.
6. Make repayments on time.
Repay any bills received by the due date. Repay over the minimum amount required on credit cards. If people are having trouble paying on time, they should contact the creditor as they may be able to work out a payment plan rather than listing the non-payment as a default. If people are disputing bills with creditors, they should still pay the bill by the due date. Better to be reimbursed the outstanding amount than have the creditor put a default on their credit file in the process.
7. Show stability.
Having a stable address, stable income and stable employment can all improve someone’s chances of obtaining credit. Right before someone applies for a home loan is not the time to change jobs – regardless of how good the wages are.
Interestingly, many errors in credit reporting occur when people change addresses, so keeping a stable address can also decrease the likelihood of bills going to the wrong address and defaults being placed on a person’s credit file unnecessarily.
People can visit the MyCRA Credit Repairs website for more help with their credit rating, and help to repair a bad credit rating.