The game of life & the watchful eye of credit ratings agencies

Just another ladder to climb

You’re on way to purchasing the brand new car you’ve been dreaming about. Literally – you’re strolling into the car dealership. You don’t have the funds, that’s ok, because your decision was ratified when you heard on the radio that this brand of car is now offering jaw droppingly low finance rates on their vehicles. It’s a sign from above – the Great Provider has given you, a young recently graduated university student, a clear sign that it is time for you have something nice and stop breaking down on the way to work in your beat up s**t box. You’ve calculated the repayments at this rate – you can afford this!

There’s a snap in your step. You feel empowered as you navigate effortlessly through the sales rep’s various attempts to throw in overpriced after-market addons. Finance is mentioned, and you eagerly refer the rep to the finance offer being advertised. The rep nods and asks you to sign a privacy form so that she can look up your credit score.

“I’m sorry,” she says, “your score is below 700 and that is the minimal required in order to access this promotion. But we can accommodate your score under our standard rates.”

She goes to state the monthly repayment and you feel crestfallen – that is a LOT more than you expected. The purchase is in jeopardy, you can see this car become a burden on your budget. Your mood has evaporated!....

You go back to thinking about getting on the property ladder, the promotion ladder and now add to the list: the ratings ladder.

In this article, we'll explore the key components of credit ratings in Australia and discuss strategies for managing your credit effectively.

Wait… Who, What?

So many of you probably have an awareness of credit ratings bodies (CRBs, as they named in Australia), and many are probably aware of the fact that these agencies track and score almost every person, calculating a number which is used by financial institutions, power & phone companies and, increasingly, potential employers (! Yep.. in certain industries) to make decisions about whether you qualify for lending (and at what interest rate) or services. But let’s just clarify exactly who these people are what they are doing.

Credit scoring began in the US in the 1950s as a mathematical algorithm which was applied to information collected about a person during a credit application. Over time the CRBs were made to conform to data privacy and accuracy regulations, and this enabled them to expand and automate the scoring process by accessing (in accordance with privacy regulations) data feeds from banks and service providers about your credit activities.

Uptake in Australia took longer to occur and Australian regulations developed differently, but the process was similar, with agencies becoming data gathering houses capable of generating live scores on any individual who has taken up a lending product, or service involving credit, such as mobile phones and household utilities. Our privacy laws contain an entire section devoted to protocols which allow “Credit Providers” to share this data for the purposes of generating credit scores. When you sign a privacy form with any of these service providers, you confirm your acceptance to share your information with CRBs!

The 3 CRBs active in Australia are Equifax, Experian and Illion. They are simply profit earning companies, but they operate within a detailed web of regulation that cements their position within our system of finance. Via these regulations, they are provided the ability to access and utilise the data you generate by liaising with various credit providers – everyone is in on it!

The game

Ok, so there are these agencies tracking and scoring me all the time. What does it mean? How can I play this game?

The exact algorithms used to calculate credit scores are the closely guarded intellectual property of the CRBs. but they generally consider similar factors when determining your creditworthiness. Their scoring systems are also very similar:

How to interpret your credit score?

The score is meant to be interpreted as an indication of how risky you are to lend to (higher score are less risky, lower scores more risky) and in this way, can and often do influence lending decisions. More on that below.

What's in the report

Your credit report pulls in the following information:

• Personal Information: This includes your full name, date of birth, current and previous addresses, and employment history.

• Credit Accounts: A list of all the credit accounts you currently have open, including credit cards, loans, mortgages, and store accounts, including the account opening date and credit limit.

• Repayment History: Every credit account listed also contains a record of repayments. Notations are made for on-time payment, 1, 2, 3 and 4+ months in arrears, and defaults.

• Credit Inquiries: If you apply for credit, chances are the credit provider will make an inquiry about your credit score. This inquiry is listed on the report and remains visible for several years.
• Public Records: Any legal actions or public records related to your credit history, such as bankruptcies, court judgments, or debt agreements, are listed.

What matters?

There are several things you can do to improve your score or prevent it from deteriorating. There are also several things people often worry about which have no effect.

1. Get Credit

• This isn’t that hard to do since most people start their credit journey as a teenager with some kind of phone contract, or some kind of Afterpay deal. When you move out of home, your utility providers will start a credit account in your name.
• But if you’ve never taken up a credit product you may not even have a credit score. At worst, you will have a score but it will sit on a default number within the ‘average’ range. When you get credit and start making your payments on time, the score doesn’t instantly increase. It increases slowly as long-term evidence of your on time repayment is accumulated.

2. Get Older

• Seems unfair right? Unfortunately, the assumption that younger people are less disciplined, less experienced and more prone to error is pretty pervasive. For example, it is common with car insurance that younger people will pay more than an older person, even if they’ve had a perfect driving history.
• This is one of those annoying and systemic facts of life. Age is built into the algorithms that produce creditor scores, as they are built into the algorithms which price insurance policies.

3. Always pay on time

• A single late payment will not destroy your credit score – accidents happen, but frequent or recurring late payments are indicative of poor discipline, and that will affect your score.
• The length of payment arrears is also important. If you are 3 months behind on a single payment, that will have a larger impact than being 1 month behind on 3 occasions over a period of time, subject of course to the point above – don’t let this be a habit!
• In short, do everything you can to pay your dues. When you sign a credit contract you are pledging your name and reputation that you will return the money you borrowed!

4. Get ahead

• Maxing out your credit facilities all of the time is not a good look. This especially applies to forms of personal credit such as credit cards, overdrafts and personal loans. Pay credit cards off in full each month (best practice), or at least make more than the minimum required repayment.
• Less important are mortgage loans (such as a home loan). Repaying more than the minimum helps but does not have a large an impact as personal credit.

5. Don’t be too much of a player!

• Yep, here is a really weird one. Offers of credit are abundant – “it’s so easy”… “balance transfer with no interest for 12 months”… “fast”… “cheap” (btw never believe that)… etc. Even your free credit report will embed some kind of offer to apply for credit.
• Here’s a rule – if you don’t need it, don’t. Constantly rolling over your credit card balance with every new offer is not good for your score. Accessing ‘easy money’ to buy anything you please or to go on holidays rather than just saving up for it is not good for your score. Accessing payday lenders is a really good indication that you don’t live within your means – focus more on budgeting, or ways to earn more and avoid the impact to your credit score.
• The frequency and type of applications on your record matters – lots of applications for personal credit will worsen your score.

6. Get your report, check the details, fix mistakes

• You are entitled to get a copy of your credit record, for free, every 3 months. Instructions on how you do this can be found here.
• Now that you have the report, ensure you query or fix anything that doesn’t look right. Each CRB offers a process to enquiry and correct your record:
  • Equifax
  • Experian
  • Illion (see FAQ “What should I do if I find something on my credit report that looks incorrect?”)
• More complex matters can be addressed by a Credit Repair Lawyer. We recommend MyCRA Lawyers but there are many to choose from. It is often necessary to engage a lawyer if you did indeed go through some kind of hardship that resulted in missed repayments or a default, but there are explainable circumstances and, ultimately, you repaid the debt.

7. Give it time

• With a history of on time repayment and responsible use of credit, your score will improve. This can take years but it will happen.

What doesn’t matter?

• Your employment status, salary, history of rental payments (assuming you have not been taken to court for unpaid rent) and your HELP debt, do not affect your credit score.
• Checking your own credit score has no effect.
• Having a credit application declined does not affect your score because the result of an application is not listed on your record. Only the fact that a credit provider inquired is listed on your record. While this has no impact on your score, a credit provider may ask you about the result of various inquiries on your record.

You are being judged, but it’s not all bad

No one likes being told they measure up poorly, especially when the scoring system is opaque and *sometimes* doesn’t acknowledge your true individual circumstances. It feels judgemental and … IT IS!

Like any scoring system, the price for clarity & simplicity is that the nuances of life, your character and your circumstances are often papered over with rules and assumptions.

You may take some comfort knowing that the score isn’t necessarily all important. There are many, many loan products and lenders out there who do not engage in any kind of ‘credit scoring’ in performing their loan assessments. This is especially true for vanilla type lending, such as buying an owner occupied free-standing home in a major city with a 20% deposit when you’re a PAYG (salary) applicant.

But by the same token, there are also many loan products which actively use credit scoring as an assessment criteria, or as a means to deliver sharper pricing. The promotional interest rate offered to applicants with a 700+ score is an example.

* Asterisk

Where credit scoring tends to have a bigger impact is for anything considered non-vanilla, such as self-employed applicants, low deposit loans, and regional locations. In these circumstances credit scoring can make the difference between approval and decline, which is such as shame because it is these people who most need more equitable access to finance in order to capitalise on opportunity and build wealth. To be clear, credit scoring in conjunction with credit provider policies has a way of further marginalising people who are already marginalised due to their choice of employment, background economic circumstances and location.

Conclusion

Your credit score is fundamental aspect of our financial system (it is not going away) and can have a big impact on your future credit applications (so pay attention to it).

Managing your credit score for the better is easier if you imagine the score as proxy for the strength of your word and reputation in returning borrowed money, on time, rather than as an all-seeing authoritarian and hugely imperfect penalty system that has the impact of marginalising certain people….