What lenders see on your credit file and how it influences your application
our credit report is one of the major components which determines whether you are eligible for finance or not. In addition it can also influence your overall repayments. The contents of your credit file will contribute to your overall credit score.
Did you know? There are multiple credit reporting agencies in Australia which all have different scores. Although the main agency that is utilised is Equifax (formally known as Veda), even Equifax has multiple scores that it uses based on various components on your credit report. To make matters even more confusing, each lender utilises different scores from one another! This means that the score you have obtained from a free online check may not be considered by some lenders.
This is where a finance broker is of assistance as lenders will not disclose which specific scores that they utilise. Regardless of the different credit scores, there are some general rules of thumb to keep in mind.
If every lender is different, what should I look out for?
Whilst every lender will assess your credit file differently, there are some general tips to ensure that you are doing the right thing by you:
Apply for finance sparingly
When you approach a lender you run the risk of them placing an inquiry against your name. Although one inquiry may have little implications, several enquiries within a short span of time makes it look like you have been rejected multiple times which negatively impacts your overall score. This is regardless of the application outcome.
Scenario 1: Maru has enquired for car finance to secure a cheaper interest rate. He has approached multiple finance companies online including his bank. Whilst he has found some decent deals he has decided to opt out with all companies to search for the lowest rate.
A few days later, Maru has finally found an advertised rate that he is happy with. Upon applying, the lender had advised that he failed their lending criteria due to repeated enquiries therefore was ineligible for that rate. Although he was not declined by any, his enquiries had impacted his score negatively.
To make matters worst, that additional enquiry reduced Maru’s score even further. This is likely to make his next finance application harder to obtain approval, let alone the interest rate he wants.
Pay your existing commitments on time
Although this may seem like a no-brainer, the difference between paying on time and not can have detrimental consequences the next time you apply. In other words, if you are behind on your loan there is a chance other lenders have access to that information. In addition, this can reduce your credit score as well.
This information will be accessible on your credit report even if a late payment has been resolved. In saying this, outstanding late payments may deem you ineligible with certain lenders by default.
Know what you are enquiring about
With enquiries showing up on your file like a muddy footprint, different loan types influence your score differently. For example, short-term finance is negatively looked upon and will drop your score regardless of the quantity of enquiries made.
Scenario 2: Sora and Sarah are best friends wanting to go on an overseas holiday together but need $10,000 each. With the thoughts of a lengthy holiday on mind, both venture online to explore their options to raise the $10,000.
Sora had made several enquiries online for short term “payday loans” as the option seemed quick and easy. Whilst she was approved, she realised that they were not able to offer the $10,000 that she required therefore rejecting their offer.
Sarah on the other hand approached a broker who was able to secure a $10,000 personal loan with ease. With this in mind, she advised Sora to approach the same broker.
Upon preliminary checks, it was found that Sora wouldn’t be eligible for the same finance as Sarah was approved for. This was due to numerous payday enquiries made against her name which caused her score to drop significantly. Whilst Sora can still be approved, it would be for a lesser amount under the $10,000 required to go on holiday.
With this bad news in mind, Sora decided to give the holiday a miss. She had discovered the repercussions of not knowing what she was applying for and how it affected her credit file.
If any adverse listings, do make an effort to have them paid off
An adverse listing includes any payment defaults and court actions lodged against your name. When payments are overdue by a certain time frame, creditors may lodge action against your name which is reflected on your credit file. This will reflect as either ‘outstanding’ or ‘paid’.
Whilst paid defaults still show on your credit file, it is better than being left outstanding. This does provide a slight boost to your score compared to an outstanding default. In addition, lenders prefer a paid default over an outstanding one as it shows an effort to resolve the situation despite it happening in the first place. This is a similar principle to paying your existing commitments on time, or at least any late commitments. It is also worth having evidence of resolution to provide as evidence if required.
If you are struggling with paying the default off in one go, it is worthwhile contacting the creditor to put in place a payment arrangement which will allow you to resolve the outstanding listing by instalments. Once the final payment is made by instalment the adverse listing will be reflected as ‘paid’ instead of ‘outstanding’.
Age of your credit file
The shorter your credit history the more your score will be affected by the above factors. This is because your credit history is limited compared to someone with established history.
For a young finance applicant, this may be deemed as higher risk, so other individual factors such as stable employment and genuine cash savings will work in your favour for a suitable approval.
If I Apply For Finance Will There Always Be An Enquiry Left On My File?
Short answer is yes, but this may depend on who you approach.
Approaching a suitable financial broker with access to lending partners is a strategic method to obtaining your best options without any impact on your credit file. This ensures that you perverse your credit score whilst seeking the information you require to make a proper decision.
In addition, there are multiple lenders who can consider your application without the need to check your credit history beforehand. However of course, lenders won’t mention this so it’s impossible for a lays person to find out which lenders these are.
What can I do to remain proactive?
Whilst there are multiple credit scores utilised, the primary bureau reporting agency is known as Equifax. There are multiple subscriptions to obtain your credit report on a regular basis. However we do recommend taking advantage of their free credit report which you are entitled to once every 12 months.
It’s worthwhile to note that you are entitled to a copy of your credit file from Equifax in one of the following situations:
- You’ve been denied credit. In this case you need to make your request for a free credit file within 90 days from the date your application was declined
- You have submitted a correction request and have been advised that information on your file has been corrected.
In A Nutshell
As your credit score can change based on multiple factors, it’s important retain control where you can.
Upon receiving your Equifax report it is okay to be overwhelmed by the information presented. If you are ever uncertain as to what your next move is, consulting a finance broker is recommended to ensure you receive expert advice. In addition, this will help your understanding for the future.