Pay a credit card or home loan more than 14 days late after the due date, and the missed payment will be recorded as a black mark against your name on your personal credit file.
Black marks for missed payments will damage a personal credit rating for 2 years.
This newsletter explains why black marks make it hard to build up a good credit history, which makes it hard to qualify for a property loan.
What personal credit data is recorded in credit files in Australia?
Almost every adult in Australia has a personal credit file with personal credit data in it.
Somewhere deep inside the computer databases of Veda are individual credit files for 16.4 million individuals. This means that 99% of Australians over the age of 18 years have credit files.
Veda is Australia’s leading credit reporting agency with an 85% share of the Australian credit bureau market. This is the credit data that Veda records on personal credit files –
Personal Information
- Identity details - current name and aliases; date of birth; gender; driver’s licence number.
- Address history – residential and business; employment history and business names.
Note: Personal information remains on the credit file permanently.
Consumer and Commercial Credit Information posted by members
- Payment history information – missed payments made more than 14 days late (after the due date) and short payments are recorded as ‘not made’ – they show a poor credit history;remain on the file for 2 years (starting December 2012).
- Payment defaults on amounts of $150 or more overdue for at least 60 days are recorded as ‘unpaid’; remain on the file for 5 years, and for 7 years for serious payment defaults.
- Clearouts – where the individual is ‘missing’ or out of contact; remain on the file for 7 years.
- Credit enquiries, credit applications made and credit refusals; remain on the file for 5 years.
- Credit account status – when the account was opened; the type of account, the credit provider; account limit but not the account balance or the actual payments; when the account was closed; remain on the file for 5 years after the account was closed.
Note: Payment history information and credit account status are new from March 2014.
Public Record Information posted by Veda
- Court summonses and court writs; remain on the file for 4 years.
- Court judgments; remain on the file for 5 years.
- Bankruptcy, Debt Agreements and Personal Insolvency Agreements; remain on the file for 7 years even if discharged earlier. Bankruptcies remain on the public record permanently.
- Company directorships (company officers) and business proprietorships (but not shareholdings); remain on the file for 10 years after they cease.
Note: The time periods commence on the date when the data is recorded on the credit file.
The new rules for accessing and sharing credit data in Australia.
As from March 2014, the Privacy Law protection for credit data was relaxed. Now, for the first time, lenders (known as credit providers) can place on a credit file, have access to and can share credit data with other lenders about their customer’s loan status and repayment history.
This means that personal loan and credit account data can be shared between credit providers such as Banks, Financiers, other Lenders, Credit Card issuers, Retail Stores, Car Financiers, Car Hirers, Mortgage Insurers and Trade Insurers. The credit data that can be shared is:
- Credit cards
- Store cards
- Home loans
- Furniture and TV rentals and loans
- Car loans
- Personal loans
- Business loans
- Investment loans
A credit provider who is a member of a credit reporting agency may record a black mark on a credit file for late payments, payment defaults and clearouts. They will have a Privacy Policy.
With the new comprehensive credit reporting rules, lenders have a more complete picture of everycurrent loan and credit account the borrower has because they can access shared credit data.
No longer can a borrower hide loans and poor repayment histories with other lenders when applying for a new loan or new credit account!
Who can and cannot record defaults on credit files?
Utilities such as Telecom Providers, Electricity Suppliers and Gas Suppliers can record black markson credit files for payment defaults and clearouts (but not late payments) as members of a credit reporting agency. But they cannot record or share their own payment history data on personal credit files.
Real estate agents, debt collectors, employers, general insurers, professional services firms; Local Councils, Water Authorities, Land Tax Offices, Stamp Duties Offices, Motor Vehicle and Traffic Authorities, and the Australian Taxation Office cannot record black marks on credit files for late payment of:
- Council and Water rates, Strata Levies
- Rent and tenancy defaults
- Electricity and Gas bills
- Traffic and Parking fines
- Income tax, BAS payments
- Stamp Duty
- Land Tax
- Business debts
- Consumer debts
- Insurance premiums
They have no access to personal credit files because they don’t give loans or open credit accounts. They are not members of a credit reporting agency.
But if they issue a court summons or a writ or enter a court judgment, this is public information, and the credit reporting agency may record it as a black mark on the person’s credit file.
Credit scores indicate lending risks
Lenders use an individual’s credit score to assess their lending risk. Now, with comprehensive credit reporting, credit scores will become more accurate and important.
Veda has a proprietary credit scoring calculation it calls a VedaScore. According to Veda, ‘It is a score out of 1200, calculated using more than 90 variables about an individual’s identity and financial history.’
To produce a credit score, Veda applies a secret mathematical algorithm to the credit data contained in the individual’s credit file to measure the likelihood of missed payments, payment defaults, court judgments and bankruptcy within the next 12 months compared with the general population.
According to an Australian Financial Review article: 994/1200 is an excellent credit score; 707/1200 is a good credit score; 619/1200 is an average credit score; and 352/1200 is a below average credit score. These scores are guides only.
Banks and finance companies have in-house credit scoring systems, to assess the information contained in the loan application and in the credit report issued by the credit reporting agency.
In the USA, it is a national pastime to maintain a high credit score (called a FICO score) because its use is not restricted to loan applications. A FICO score is based on more personal data than in Australia, and is used for practically everything from loan applications to rental applications to job applications.
A cricket score can be final,
a credit score changes
Tips improve to your credit score to - AAA personal credit rating
All of these factors influence a credit score/personal credit rating:
- pay on time – pay within 14 days, and definitely within 60 days of the due date for bills of $150 (or more); payment authorities will help; update payment authorities when a new credit card issues with a new number;
- do not ‘shop around’ for loans – keep to as few as 3 credit enquiries per year;
- pay out payment defaults - and have the credit file marked ‘paid’;
- stay in the same job (job stability) and stay at the same home address for at least 2 years;
- hold off making loan applications for 2 years after a credit blemish is recorded;
- avoid being a company director – because if the company goes into administration, receivership or liquidation, a black mark is recorded and an explanation is required;
- transfer accounts when moving – particularly electricity, gas and telephone;
- update personal information on the credit file - particularly addresses to avoid a clearout listing;
- reduce limits or cancel credit cards and store cards, when applying for a loan because they are treated as fully drawn when calculating monthly commitments.
Checking your credit file and repairing credit
Everyone should check their credit file annually to find out who has been making credit enquiries and to correct errors. File access requests are not recorded on the file as credit enquiries.
To order your personal credit report from Veda, click on www.mycreditfile.com.au The service is free for one basic credit report per year. The credit report will be sent out within 10 business days. If you are in a hurry or want your credit score, pay the fee. If you want to receive a credit alert each time your credit file is accessed, pay the fee.
If the credit file contains an error or wrong information, report it to the credit reporting agency. It has 30 days to either correct it or substantiate it.
Most ‘credit repair’ requests will not remove the default notation from the file. But ‘status’ can be corrected to add ‘paid’ or ‘disputed’ or ‘current’ or ‘finalised’ or ‘defended’ to the entry.
This is the Veda policy –
Generally speaking, information on your credit file is not removed before the expiry date unless there is an error. If the information is incorrect, it’ll likely be corrected rather than removed.
If not satisfied, apply to the Australian Information Commissioner to correct the information.
If the credit problem is difficulty in meeting loan repayments, Veda cannot solve it. A hardship application to the Credit Ombudsman or Financial Ombudsman is the solution.
How a good income and payment history gives a good credit score
Borrowers need to prove a good, steady income to service a loan. Consider these –
- Full time employees – same job for 2 years or more – have excellent serviceability
- Casual employees and the self-employed - need 2 years tax returns, tax assessments, BAS statements to prove serviceability
- Property investors – about 80% of their rental income is used to prove serviceability
Borrowers need a good income history plus a good payment history to have a good credit score.
Borrowers with on time repayments for 2 years and no serious defaults have a good credit score. They can expect to pay lower interest rates, and will find it easier to qualify for a loan.
But borrowers with black marks for missed payments within the last 2 years have a below average credit score. They can expect to pay higher interest rates, or to need a higher deposit when buying a property, or to have their loan application rejected.
Overseas experience says that credit history has a 35% weighing in a credit score. That is why when looking to borrow money tomorrow, it is advisable to create a credit history today. And that is also why missing a credit card payment makes it hard to qualify for a loan.
What else must a borrower have for a property loan?
Apart from proving serviceability, borrowers need to provide good security - the property value must be enough to support the loan amount.
Property lenders will lend a percentage of the property value (loan-to-value ratio or LVR), depending on the location and the use. Consider this as a general guide –
- City or large country town owner-occupied houses - up to 95% of value
- City commercial properties – shops, offices, industrial, warehouses – mostly 65% to 70%; up to 80% of value for loans up to $1.5 million
- Small country town owner-occupied houses - less than 10,000 people – up to 80% of value
- Country properties used for farming or grazing – up to 25 acres: 70% to 80% of value; above 25 up to 100 acres: 70% of value; and above 100 acres: about 50% of value
- Residential investment properties in cities and towns – 90% of value for small loans, 80% of value for large loans, and for a total loan exposure of over $1 million
Note: What percentage of value will be available will depend on the borrower’s credit history. For example, a borrower with a good credit history might be approved to borrow close to 95% of value of a city house. But a borrower with a poor credit history might be approved for 80% of value for the same property.
Disclaimer: Because lenders assess borrowers differently, and because each borrower’s circumstances are different, the comments made in this newsletter are not to be relied upon in specific cases.
The Investor’s Guide to Property Ventures has been produced by Cordato Partners Lawyers, as part of its Property Law practice. Our team will meet all your conveyancing needs.
To join the free mailing list for the Guide (mail or email), Contact us by email – info@propertyinvestmentlawyer.com.au or by phone (02) 8297 5600. Our office is located near Wynyard Station at Level 5, 49 York Street, Sydney NSW 2000.
Related articles:
Loan qualification is becoming harder
The Fink Case – Fink’s FollyThere is (almost) no consumer protection for business loans
Who we recommend as mortgage brokers / finance brokers
Property Loan Alert for Interest-only loans - Why interest-only loans are being restricted in Australia