Did you know that credit reporting is going to change?
If you are looking for financing after the 12th March, you could be in for a bit of a shock.
The way things are currently reported on your credit file is about to change. Under the current system, your credit file only records the number of credit enquiries someone has made and whether or not you have any defaults, judgments, bankruptcy, etc.
Under the new system, in addition to the above, every time you miss a payment by more than five days, your credit file is given a black mark and your credit rating worsens.
Other criteria that can be listed on your credit report include –
- 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
You may be thinking that this doesn’t seem so bad, but if you are a late payer of your utilities bills (which some of us are) this could have some serious implications for you. It will affect how your credit is rated and whether you will be able to obtain finance on anything.
When applying for finance and/ or a mortgage is that many of the lenders now rely on “credit scoring” when assessing loan applications. Credit scoring is a tool used by the banks to rate your creditworthiness and ability to borrow money. Factors that can affect your credit score include:
- Loan to Valuation Ratio (LVR) - A higher LVR loan will be scrutinised more than a lower LVR loan - So a larger deposit will benefit your application
- Assets to Age Ratio - Is your asset position reflective of your time in the workforce? You may need to mitigate your circumstances if this is not the case
- Personal liabilities - If you have too many personal liabilities, this will result in a poor credit score. A high LVR coupled with a high number of personal liabilities gives the lender a perception that you have a low ability to pay down debts
- Serviceability – before you apply for a loan, you need to ensure that you have the means to repay the loan. You may need to consider repaying or reducing other debts to improve your serviceability.
- Employment stability - If you have recently changed employer, you need to demonstrate a stable history of previous employment.
- Previous credit enquiries – It is important to limit the number of credit enquiries you make over a 12 month period. Too many enquiries reflect poorly and leaves you open to further scrutiny from the lender.
Here are some suggestions to keep your credit rating clean and in good order:
- 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 www.mycreditfile.com.au/
- Ring the lender or utilities provider to negotiate a repayment term.
- Pay a debt more than five days later
- Shop around for credit cards and store leases when you don’t need them
- Fail to contact the lender to renegotiate your repayment terms.
So just be mindful next time you are struggling to pay a bill and ring the provider ASAP to discuss alternative arrangements.
Written by Anthony Martin, Mortgage Broker of Laurentide Mortgage Solutions.