If you are under 30, step away from the credit card. I'm not saying don't get one – today it's an even faster way of building a credit history and demonstrating you're a good risk.
But put it the hell down.
It's been two years now that your credit report has been a warts-and-all, "naked" snapshot of your money self. Not just "defaults" or non-payments show up, but any occasion you've missed a repayment by as few as 14 days.
Every time you apply for credit, you grant someone a look at this candid picture. And anecdotes and analyses suggest today's millennials are more at risk from it than anyone else.
Bankers are quietly talking about an uplift in credit card applications from young people, specifically to establish a credit rating. Hello temptation.
Your VedaScore, issued by the biggest of three credit ratings agencies, tells the story of your credit-worthiness. The average is 771 (out of 1200), which falls into the "very good" range, but millennials score the lowest of any generation at 682: "good" but by no means great.
Veda says they are also the generation most at risk of credit default in the next 12 months – with 18% in payment peril.
Only 13% of generation Xers are at risk and 6% of baby boomers.
And millennials are, by dint of age, the most likely to want credit in the future for big-ticket items such as a car or home.
So are you in danger of being seduced by the spending possibilities and stuffing up your future faster than ever?
GetCreditScore – yep, a site where you can access your credit score, for free – has surveyed 30 and 40-year-old customers about their credit behaviour in their 20s and found:
- 48% missed at least one monthly credit card or loan payment in their 20s, wiping points of their credit score
- 44% maxed out their credit cards, affecting their credit score into their 30s and 40s
- 40% of all respondents claimed that financial mistakes made before they turned 30 negatively affected their quality of life - difficulty accessing loans and financial products hurt their relationships and employability.
Generation X isn't so smug now, is it? But if you're a money-challenged 20-something today, such behaviour means you will suffer disproportionately.
Australia's now two-year-old, "positive" credit reporting system means two years of your repayment history, and more information, is always available for prospective lenders to see. The former "negative" reporting system had only large transgressions recorded.
Credit companies know even the semi-bad things you've done and it can affect not just whether you get credit but the cost of it.
What's called comprehensive credit reporting has brought a (potentially) nasty little concept called risk-based pricing, common in the United States, to our shores. This means lower interest rates for higher credit ratings but, you guessed it, higher interest rates for lower credit ratings.
It heavily influences the rates of new-breed "peer-to-peer" lenders, outfits that take banks out of the equation and directly match investors with borrowers.
Finder analysis of the grading system of biggest player SocietyOne found that the personal loan rates customers are charged can vary from 9.4% to 19.94% (over five years), depending on their level of risk. For a $10,000 loan, the interest ranged from $2,572 to $5,876.
A poor credit rating will cost you with mainstream banks and loan providers, too. Those secret mortgage discounts I talk about often? You'll get them only if you are a model money citizen.
To be clear, this is the way many countries around the world assess and offer credit. And just 24% of Australian credit providers have comprehensive data loaded onto the Veda bureau so far, while only a few of these have begun to access this data to make approval decisions. (Telcos and utilities don't give and can't get the repayment history information. They can only record a black mark for non-payments beyond 60 days that lasts five years).
But it's a growing concern if when it comes to debt, you're living casually. SocietyOne says one in every two people who get a loan from them do so to consolidate their credit card debt, and since January there's been a 25% increase in loans specifically to address credit card debt.
You need a squeaky clean file to stop you falling foul of risk-based, rate-biased pricing. So whatever you do, get savvy and stay solvent.
Only 2% of respondents to GetCreditScore's survey said the education system taught them about managing their personal finances, so it's up to you and yours (50% learnt about personal finance from family members).
The government's financial education site MoneySmart is a great place to start. And of course, we constantly strive to inform and advise.
Meanwhile, if you desperately want something you just can't afford, lay-by it. Your parents will explain.
How to get a perfect (credit) report card
You need to take the following steps to stop all this disclosure derailing your future.
- Step 1: Resolve any outstanding issues with creditors (whether bill or borrowing).
- Step 2: Obtain a copy of your credit file to make sure everything on it is correct. There are three credit agencies you can approach for this: Veda, Dun & Bradstreet Australia and Experian Australia. You can get your file free if you wait for the snail-mail version.
- Step 3: Fix any past blips directly with the provider, or record notes on your file via a ratings agency, to ensure they don't hurt your chances of getting a loan application approved. Don't pay for this; it's time consuming but simple.
- Step 4: Set up direct debits for all your regular bills so there's no possibility you will forget about them and undo all your good credit repair work. Alternatively, set up payment reminders in your phone. And notify all credit providers if you move house.
- Step 5: Take heart that evidence of conscientious credit repair will – eventually – put you in a positive light with creditors. Be careful not to make too many applications for credit in future and talk to your provider immediately if you are struggling to meet repayments; they'll have a hardship policy that might save your rating.
Remember, the bottom-line benefit of these five easy steps is not just, say, a loan for your dream home – at an interest rate you can afford – but also the ability to get connected (utilities, telecommunications) and protected (insurances).
This article was originally published by the Sydney Morning Herald on 28 February 2016. This article represents the views of the author only and does not necessarily reflect the views of AMP.
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