Comprehensive Credit Reporting has been hailed as a win for borrowers, giving more Australians a fighting chance at a home loan approval.
However, there are inherent problems with the positive credit reporting system that are seeing good borrowers unfairly targeted. Will you escape the firing line?
Savers don't have high credit scores
If you have no debt, then you have no credit history.
Equifax (the credit reporting agency formerly known as Veda) doesn’t consider any money you have in the bank.
You could have $100,000 in savings, but you would be considered as an ‘untested borrower’ if you don’t have any loans.
Someone with several debts paid on time will score higher.
Paying your bills on time, such as electricity, phone and gas, will not show up as positive repayment history on your credit file.
They can, however, still show up as a default if you are more than 60 days late.
The same is true for HECs / HELP debts.
Solutions:
- Take out a small credit card and pay this on time each month.
- Alternatively, apply with a lender that doesn’t require a credit history.
Good borrowers are being punished for making a mistake
Whether you were away on holiday, you were between jobs, or you just forgot, missing a payment on a debt facility like a credit card bill or personal loan can happen.
Under positive credit reporting, payments of any amount that are more than two weeks overdue are listed as late on your repayment history information.
In addition to this, the listing will remain on your credit file for up to two years!
In the past, you wouldn’t have to worry about this unless they asked for a statement for that debt.
If you do this twice in one year, say missing a payment on a credit card and then missing a payment on a car loan, your home loan could be declined.
Your recent payment history is given more weight than other parts of your credit file.
The alternative is to incur a default on your credit file, which should be taken more seriously because you were overdue more than 60 days.
Solutions:
- Set up autopay for your accounts so your scheduled payments are automatically deducted from your account.
- Ensure that you have a buffer in your savings account to avoid overdrawing your transaction account.
- If you already have missed payments, try to get up to date and stay up to date for 6 months or more.
- If you move, update your details with your lender, credit card provider, utility providers and all other account holders.
If you’re having trouble with your repayments, notify your credit provider sooner rather than later to avoid defaulting on your payments. Most of them want to work with you!
Hiding debts is a sure fire way to get in trouble
As mortgage brokers, we increasingly see some borrowers try to hide their debts from banks in an attempt to borrow more.
It’s irresponsible to do this and, at worst, it is fraud.
Ultimately though, all of your debts appear on your credit file, and lenders will check your bank accounts anyway.
If you don’t declare your debts to the lender, then they’ll decline your application on the spot and may put you in a database of known dishonest borrowers.
Solutions:
- Declare your debts when applying for a loan including any credit cards that are inactive.
- Borrow within your borrowing capacity.
- If you want to borrow more, talk to us about what options may be available by calling 1300 889 743 or by completing our free assessment form.
Lenders rely more on your credit score than they did in the past
Lenders have long recognised that your Equifax Score was a useful tool when assessing a loan, but they were willing to consider exceptions.
Now, your Equifax score is much more useful to lenders!
The reason is that it has more information and is a better predictor of which customers are likely to pay their loans back on time and in full.
More lenders now have a low-risk tolerance. In some cases, lenders want no more than 1% of their customers with missing payments.
If you have a low Equifax score you will be locked out by the major banks.
Of course, the reality is that even if you have a low Equifax score, you are still very likely to pay your loans back.
Solutions:
- There are specialist lenders that can help people with a low Equifax Score, so you can use them to rebuild your credit history.
- We can then help you to refinance your home loan to a cheaper lender.
Will positive credit reporting stop you from qualifying?
We have a range of lenders to choose from, many of whom take a common sense approach to your situation.
We do not believe good borrowers who have made a past mistake should miss out on buying a home!
Call us on 1300 889 743 or complete our free assessment form to discover if you qualify for a home loan.