The new era of credit reporting: Are you ready?

On the surface, the credit approval system seems straightforward.

Your credit approval result will typically be determined by your credit report in conjunction with each individual lender’s credit scoring system. Every application for finance will trigger a credit check or credit report to be obtained.  This is only with the permission of the borrower and usually in the form of a signed document called a Privacy Notice, or an Acknowledgement and Consent.

But changes introduced in March this year brought a new era of credit reporting. The previous system that you would be familiar with contained only “negative” credit information – it didn’t state the outcome, good or bad, for any enquiries - only reporting arrears, defaults judgements or similar information. However, the system has evolved toward a new “positive” credit reporting regime, a concept is currently applied in the USA and New Zealand.

As you might assume, positive credit reporting also includes ‘positive’ information about an individual’s credit position. So along with all the missed payments and default judgements, your credit report can now include five additional pieces of information relating to your current credit commitments:

• Type of account (e.g. credit card, home loan etc.)
• Date the account was opened and closed
• Details of the credit provider
• Credit limit placed, credit utilisation rate and balance of the account
• Repayment history

This extra information is believed to reward clients who have better credit habits with a higher credit score, and fairly so. Interestingly, even though it’s been presented as positive reporting, it actually can be a negative for some clients. As an investor, you need to know what you should do to ensure you get the best score possible.

From a lending perspective, the move to the new reporting system has gone through with a few clunks. In some instances, they have tightened up and a few borrowers have been caught in the middle.

Previously, borrowers who may have had no official black marks against their credit file could still score well, even if they were tardy with their repayments or not adhering to the limits of their credit facilities. Many people are not adequately educated about the hazards of bad money habits; paying just a little late has a seriously negative impact on their credit scoring which isn’t something properly addressed a lot of the time.

It has been my experience that lenders by nature will never give an applicant the benefit of the doubt, preferring to decline an application than take the risk.

As I mentioned above, most consumers don't fully understand the implications of credit checks or applying for credit. Each time you apply for credit, the enquiry is listed; the amounts and frequency can affect your scoring. This is the same if you go to a new bank or apply to increase your existing limit. Lenders don't exactly explain this when you apply for credit either.

So shopping around for the cheapest credit card and applying on line and pressing that "APPLY NOW" button should really be followed with a big warning checking that you understand that this could seriously affecting your rating.

It’s frightening to see some of the articles written about how to improve your score, and I really encourage everyone to think carefully before actioning any advice offered to them regarding this matter. Some people suggest that you need to get credit cards to help your credit rating and tips how to play with balances and having them, even if you don’t need them.

Others suggest spreading the type of loans around but clients with unsecured personal debt score low with most lenders, unless of course the credit card is one of theirs.

To expand on this, it is common practice by all lenders that an automatic credit check is performed for every loan lodged.  This means that in cases of an active investor, multiple enquiries may occur on the file of the same client from the same bank. If the client is using Lenders Mortgage Insurance, they will then also have the insurer’s enquiry logged in addition those of the lender.

A more common sense approach could see only one enquiry being registered per client at that time, and the information being shared with the insurer.

Admittedly all this does sound a bit daunting.

But remember, being aware is the key to making an informed decision and positive changes in any situation, and your credit report is no different.

There are of course plenty of ways to ensure you’re on top of your credit score - we’ll go into that next time!

MICHELLE COLEMAN is an award winning finance broker and managing director at W Financial.