Full implementation of comprehensive credit reporting means good repayment histories will now be included in the scores for the first time.
First-time home buyers are benefiting from the new credit score system, as well as the falling property market in Sydney and Melbourne.
Previously the credit record only contained negative information, such as missed payments of more than 60 days or bankruptcies. Now Australia is moving towards full implementation of comprehensive credit reporting, which means good repayment histories are included in the scores for the first time.
That gives those with tarnished records an opportunity to quickly improve their scores. Since younger people were more likely to have black marks against their name, they have the most to gain from the new system.
Falling behind on credit card repayments can be a warning sign of cash-flow problems, though some people are just forgetful. Analysis of more than 9 million individual credit card holders by credit agency Experian found those with two credit cards were 54 per cent more likely to miss a payment than those with one.
However, for those thinking of applying for a loan, who have no credit history, getting a credit card and paying it off on time, will increase their credit score.
Comprehensive credit reporting was introduced in 2014 but it's been limited because it wasn't mandatory and the banks did not come on board. The quality of data is improving with the banks, who hold most of the data, recently starting to share their customers’ data with credit agencies.
Jennifer Lele, 32, works as an area manager for a fashion brand and intends to buy her first property with her husband. She wants to make sure her credit score is as high as possible when she and her husband eventually apply for a mortgage. The couple, who have a son, 18 month-year-old Finn, are renting in Melbourne’s Elwood.
“We are looking to the future and there will probably be another baby and we are hoping to buy a house or an apartment in next 18 months,” Lele says.
She is pleased about the reduction in property prices in Melbourne. She and her husband could end up getting into the market just as prices bottom.
“Now that I am back at work full-time, this is the perfect time to be saving for the deposit,” Lele says. “I have not looked at my credit score but I have always been careful with money."
Lele started recently using a credit card, which she holds jointly with her husband, as she is aware that a positive record of on-time repayments is included in credit scores, alongside black marks such as missed repayments.
“Someone said to me that you need [a credit card] to show people how good you are at managing money and paying back bills and we got a credit card for that purpose,” Lele says.
Experian data shows 5.8 per cent of those aged 25-44 who have an average annual household income between $78,000 and $130,000 are most likely to miss credit card repayments.
Experian's figures show they are more than twice as likely to fall behind in payments than others, but they are the ones most likely to buy their first properties.
Poli Konstantinidis, executive general manager of Experian Australia and New Zealand, says potential home buyers needed to be aware that their credit card usage, including the number of cards they own, can have an impact on their future home loan applications.
“Lenders are now able to see the number and type of credit accounts people have and whether they have been paying loans back on time, which helps them better evaluate who to provide credit to and lend more responsibly,” he says.
Anybody about to apply credit should check their credit report regularly to make sure they are not applying for a home loan with a poor credit score, Konstantinidis says.
Leading credit reporting agencies include Equifax, Experian and Illion. They are required to provide a free credit report to consumers at least once a year.
Consumers’ credit scores vary depending on the credit agency. They each measure and weight financial events differently. An agency may give more weight in their scores to bankruptcies, for example, than their competitors.
How to repair credit scores
Geri Cremin, spokeswoman for Australian Retail Credit Association, whose members are mostly lenders, says making repayments on time is the best way to build your credit health.
"Even if it’s a small loan or small credit card, as long as you make repayments on time, you’ll start building a strong repayment history, which shows potential lenders that you can manage credit responsibly," she says.
That healthy credit history will be an asset when you want a larger loan, for example, a car or home loan, further down the track.
“A default stays on your credit report for five years but even a late payment can stay on your credit report for two years. The more late payments on your credit report, the more your credit score will drop,” Cremin says.
An easy way to stay on top of your repayments is to talk to your credit provider about setting up automated payment or direct debit, she says.
“Putting your repayments on auto-pilot might help when you’re away on holiday, or busy at work, and would otherwise forget to stay on top of repayments,” Cremin says.
Overall, the advent of comprehensive reporting will see credit scores rise as the positive data will offset negative data.
This article was originally published by The Sydney Morning Herald on 31 October 2018. It represents the views of the author only and does not necessarily reflect the views of AMP.
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