What Is Credit?
Credit is when you make an agreement with a Lender or Credit Provider that you will owe them a debt and agree to pay them back later. This usually occurs because most individuals do not have the full funds to pay for a service or product outright. The debt is paid over time and may incur interest. A credit provider includes entities like banks, credit unions and finance companies.
Before a credit provider can grant you a loan, or sell you a product on credit, they must ensure that you have the ability to pay the loan back. If you do not have the capacity to pay the loan back, the credit provider will not be able to approve the loan you are requesting.
Comprehensive Credit Reporting
The Comprehensive Credit Reporting standard was brought in to help credit providers with the decision to lend or refuse an individual’s loan application. This standard has been implemented in Australia as of 1 July 2018.
Comprehensive Credit Reporting is now part of the credit application process. Lenders ask about your financial situation to be able to work out whether you are capable of paying back the loan.
Credit providers will check an individual’s income and expenses. However, they may also obtain a credit report about your overall credit history from a credit reporting body. Credit reporting bodies are businesses that compile and provide credit reports on Borrowers to Credit Providers. A credit report will show how an individual generally handles their debts. It is a record of your credit activity and credit history.
To find out how you can obtain your yearly FREE copy of your credit report, visit CreditSmart.org.au
What Is In Your Credit Report?
A credit report will include the following details about you:
- Personal information that will identify you, such as your:
- Date of birth
- Employer’s name
- Consumer credit liability information (showing credit accounts currently open and/or had open in the last 2 years):
- Type of credit account
- Credit limit
- Credit provider
- Open and closed dates for accounts
- Repayment history includes payment history of any credit cards and loans you may have. They will be able to see a report on a month-by-month basis for the last 2 years. Only banks, credit unions and finance companies can access your repayment history. NOTE: individuals are provided a 14 days ‘grace period’ applied to the first overdue payment. Payment made within this period will not affect your credit report.
- Consumer defaults lists any defaults you may have had. A default “is a formal notification from your credit provider to a credit reporting body that you are 60 days or more overdue in making a payment on a debt where the outstanding amount due is at least $150”. Note: a default will remain on your credit report for 5 years.
- Consumer serious credit infringements indicates to a credit provider that the debtor has acted fraudulently. It will remain on your credit report for 7 years. This could have also been due to the debtor failing to comply with their credit obligations.
- Consumer credit enquiries lists details of the applications of credit you’ve made. It will remain on your credit report for 5 years from the date of the application.
- Other types of enquiries from businesses will be listed in your credit report. Certain businesses involved in credit applications may also be required to access your credit report.
- Commercial credit information is an overview of the credit accounts, defaults, infringements and enquiries of any credit accounts you have and currently hold with a credit provider.
- Public record information shows information about your credit activity that comes from publicly available resources (e.g. Personal insolvency information, credit-related court judgements and information about company directorships you’ve held).
- Access Information is a list of everyone who has accessed your credit report. This ensures privacy is maintained. “By law, your credit report can only be accessed by others in legally permitted circumstances”.
The overall credit report is condensed into a “credit score”. This is a single number used by credit providers to give them an idea of your “credit health” or “credit worthiness”. Your credit score helps the credit provider determine whether to approve a loan application or not. Your credit score is compared against other borrowers and will also determine how much interest will be charged for the loan.
It is vital to keep your credit score as high as possible at all times.
Please note, you can have several credit scores as each credit reporting body may have their own credit score.
How To Come Out On Top
What’s on your credit report? It is important to check your credit report on a yearly basis to know if there are any problems that need fixing. Keep track of your credit score and make sure it stays high or improves yearly. You also need to make sure your data is kept accurately. Your credit report enables you to check if any loan applications were made in your name without your consent. Furthermore, you can check if loans were accidentally added to your file. All these problems can also be rectified once reviewed.
Do not borrow more than what you can handle. Difficulties in repaying a current loan may result in difficulties in applying for another loan in the future. Close any unused accounts that you no longer need. Keep credit cards to a minimum. Do not apply for more credit cards if you know you will not be using them. Too many credit card applications can raise suspicion with credit providers and may adversely effect your credit score.
Pay your bills on time. Pay at least the minimum payment in a timely manner. Falling behind on repayments regularly can impact your credit score and ultimately your financial health. If you are having issues with making your repayments, talk to your credit provider so you can work out a payment plan in the interim.
Contact your Mortgage Broker for advice on how to maintain or improve you credit score in order to assist in your loan application. The OneSite Team are always available and happy to help you!
For further information on managing your credit report, please visit https://www.creditsmart.org.au/manage-your-credit-report/