If you’re like most Aussies, you have financially struggled more than usual during the past year or so. And you might be looking to streamline how you manage money and optimise your economic arrangements.
But you’ve probably also wondered: how will it affect my credit score if I change my products, move my money or, if the situation has become/became a little more serious, ask my creditors for financial hardship?
Yahoo Finance has obtained the exclusive answers from Equifax, one of the biggest credit reporting agencies in the country.
Equifax, along with Experian and Illion, are the custodians of what you can really think of as your money selfie. And this one is ‘warts and all’, and possibly in need of some financial photoshopping.
Let’s first get straight what this selfie doesn’t include: which is any information about your insurances or history of rent payments (but a real estate agent will, of course, have this and it could affect your ability to secure another lease).
But here’s the potential impact of your various other money moves, including the seemingly sound ones.
What you need to know
First up you need to know that since 2019 – when the Big 4 were strong armed by the government into providing all your information to allow it – we have had a fully fledged US-style of credit score.
It’s your credit record that contains all the data to produce this score.
Now, the Equifax credit score is a number between 0 and 1200. But know that all scores are a harsh judge: on this scale, a number as low as 755 is still considered “good”.
Your credit report lists all your credit enquiries, payment defaults and public record information, but also deeper information like:
account information such as the date an account was opened and closed;
your credit limits;
the type of credit account; and
24 months’ repayment history.
This last one, your repayment history information, can only be provided by, and shared with, licensed credit providers. So that rules out telecommunications and utility companies.
But there’s more to it than that.
The worst money moves you can make
Money mistake 1: Defaulting on a bill
It’s considered you have defaulted on a bill if you are late by 60 days or more, and this will be listed on your credit report if it is over $150. Such defaults stay on your credit record for five whole years. Your score will be hit hardest if you are overdue for multiple repayments for 60 days or more, or overdue for one for 90-plus days.
Money mistake 2: Missing a credit repayment
If you miss a credit repayment by 14 days or more, that will be recorded on your repayment history and not fall off for two years.
For example, if you have a mobile phone bill of over $150 and it was due more than 60 days ago, your phone company can have it listed on your credit report as a payment default. Note though that the credit provider must take a number of steps first. In particular, it must send two separate written notices to your last known address.
Equifax says if it is a once-off it will have minimal impact on your credit score, however if repayments are missed over a number of months, it will definitely have a negative impact. More recent payment misses will have the greatest impact on a credit score.
If you have a more recent positive repayment history but an older default, this may help to counteract the negative impact of the default.
Money mistake 3: Applying for unsecured debt
In general, secured finance (where you offer up an asset as collateral) is more positive than unsecured personal loans or credit cards. Unsecured, short term loans, can have a negative impact on a credit score.
So mortgages, credit cards, personal loans and store finance carry different levels of risk.
Of course, mortgages are secured finance – over a property – and can actually have a positive impact on a Credit Score.
The seemingly innocent moves that hurt you
Beyond the type of credit you apply for, it’s vital to know the amount of that credit – say the size of the loan or credit limit – will have an influence.
But then there is a quality and frequency issue.
Here are some of the most damaging, surprising examples.
Surprise score sinker 1: The first is making four or more enquiries in one year for a personal loan.
And note that, although buy-now-pay-later facilities are currently exempt from the National Credit Act, Equifax also views these applications as a personal loan. So these, too, will depress your score.
Surprise score sinker 2: The type of lender itself from which you seek any credit makes a difference: the more mainstream, the more favourably it will be viewed.
Equifax’s marking system assumes different levels of risk to approaching a bank, store finance provider, hire-purchase and utility company for credit. What’s more, research shows that there’s different risk with lenders in the same industries.
One relevant one may be that a non-traditional or alternative lender could have a different level of risk than an older-style bank or credit union.
That’s not to say you shouldn’t go for an alternative lender, though. You’ll likely get far cheaper rates from such a lender so there is a balance to strike!
Surprise score sinker 3: The final unexpected downwards driver is applying for two or more credit cards close together. Such applications stay on your credit file for five years, although their influence will also diminish over time.
But similar to the above, it is still well worth transferring a balance to a 0 percent deal to be able to pay it off more quickly, interest-free. You can get up to 30 months at 0 percent at the moment, so even a second application after that – if you haven’t managed to entirely clear it within the first interest-free period – shouldn’t hurt you too much.
Free services like , canstar.com.au, creditsavvy.com.au and finder.com.au provide individuals with the top four contributing factors to their score and show how much impact, positive or negative, that factor played in their Equifax Credit Score.
You can also get your credit record for free once a year from agencies Equifax, Experian and Illion.
What else do I need to know?
Unfortunately, beyond those details, it is not a simple answer.
A spokesperson for Equifax says: “Given the nature of the way score algorithms work, we can't provide a specific numerical impact on what a certain money move will have on an individual's credit score.
“A credit score is based on the information on an individual's credit report at a point in time and the combination of all the factors will be slightly different each time.”
What if you are in financial trouble? What if you have asked creditors or providers for special consideration over the COVID-19 lockdown periods, or officially applied for financial hardship concessions?
Equifax says: “[We are] actively engaged with customers, industry and government to clearly measure and articulate the impact on consumers’ credit reports and scores.”
In April 2020, members of the Australian Banking Association agreed that customers who deferred their loans as part of a COVID-19 assistance offering would not have missed repayments reflected on their credit report.
And, as always, though it’s completely counter intuitive, if you will struggle to make a credit repayment, it is best to contact your credit provider first.
Note too that recently inked legislation means that financial hardship information will soon be deleted from your credit report after 12 months – it is 24 months for regular repayment history. So a short-term money drama won’t become a long-term financial trauma.
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