What do lenders mean by a good credit score? Most people don’t know they even exist let alone realise how important they are to getting the loan you need. Andrew Mirams has had to explain this quite often and does it for us this week in the show.
Kevin: Just what do lenders mean when they talk about a good credit score? How do you get one and how easily is it damaged? Let’s find out a little bit more about credit scores. Joining me to talk about that, Andrew Mirams from Intuitive Finance.
Andrew, welcome to the show once again. Thanks for your time.
Andrew: G’day, Kevin. Thank you.
Kevin: How are credit scores assessed, and how important are they?
Andrew: A good credit score is vital to be able to get access to credit. And credit now ranges from anything from a loan down to a mobile phone or a utility. Having defaults or bad payment history is going to affect you just in your normal way of life currently, and it obviously will have a significant impact on securing a mortgage or a home loan or an investment loan.
Kevin: So it’s called a credit score; is it actually a score as in numbers, or is it a series of references?
Andrew: A credit history is probably more what you’re talking about. There are things called My Credit Score and Veda check that you can do that’ll tell you what your credit history looks like.
In reality, the only thing with your credit history that matters is if you have bad history. Once upon a time, we all used to get dressed up when we were 18 and our father or grandfather would take us into the bank to get that loan so that we could get a good credit history. That doesn’t matter now because every little inquiry made for a mobile phone or a utility or anything like that actually goes on it.
What you really want to do is just make sure you’re managing to have a good credit history, and that’s just keeping your day-to-day accounts in order, making sure you’re making your payments on time, and everything like that. If you get overdrawn on just your normal bank account by $10, that’ll have a hit on your credit score.
There’s a website called My Credit Score. You can actually put in some information and data that will give you a bit of an idea of whether you’re going to likely be a good credit risk or a bad credit risk to a lender or someone you’re going to seek finance or credit from.
Kevin: If a lender knocks me back because I have some blemish on my credit score that I’m not aware of, will they necessarily tell me about that, or will they just knock me back?
Andrew: Normally if a lender declines, they’ll say “Because of your credit report” or something like that. Some lenders or providers will provide you with the evidence and the details of it. Otherwise for the cost of about $30 or $40, if you really want to check your credit score or get your credit report, you can go to a group called Veda Advantage, and like I said, for the cost of about $30 or $40, you can actually get your personal credit file from there and then have a look at the inquiries that have been made.
Every time you sign a credit application you need to make a disclosure so that a lender or a provider can do a credit check on you. All those inquiries will be there. Any bad credit or any defaults or anything like that will be listed.
Sometimes for people named, say, John Smith, because it’s a fairly common name, these things can get put on the wrong credit file. So it doesn’t mean no; it just means if you can clear it up – and depending on the size of the default or the error of your ways that there’s been – then as long as we can get an explanation around it, often we can still get finance approved.
Kevin: You’re suggesting that we should check it on a reasonably regular basis.
Could I ask you another question just while it occurs to me? If I go to get a loan – say I go to one of the major lenders – and they knock me back, will the fact that they’ve been in to have a look at my credit score be reflected there? In other words, if I went to another lender they’d know that I’d already been to the other lender – in other words, there’s a history?
Andrew: Great question, Kevin. This is why we advocate for not making multiple applications at one time. Yes, every inquiry does get recorded. Whether you’ve been approved or declined at one lender, that will reflect on your credit inquiries. It’ll be marked as an inquiry there.
Now a inquirer will say “Well, what happened with that? Did it proceed? Did it not proceed?” They don’t ask the outcome. They won’t ask whether it was approved or declined, but they’ll ask “Did it proceed, or did it not proceed?”
If you have multiple checks on there, all of recent times for relatively similar amounts, that will start to raise a new lender’s inquiry: “What are they looking for? What am I missing here? What might be something? If they’ve done two or three applications, why are they coming to me? And if I’m going to approve it and if there’s something there,” they might say, “Hmm, there’s something here we want to look a bit further into. Give me the details of those applications.” So it can actually work to your detriment.
Kevin: It’s almost like a red flag, isn’t it, coming up and saying “This person is someone we need to be careful about.”
Is there any point in time if I had something against my credit score that was incorrect and then it was taken off, does it get totally removed, or is there just a note to say that it doesn’t apply?
Andrew: if it’s recorded incorrectly, it’ll get removed. A quite common one is when a group of young people all go into a co-share or a tenancy together, and the person who signs the lease might move out. Then when the other people all leave the property and the property is handed over, often that last power bill or something is in default. It goes to the first person who was there, and often it is doesn’t become known to them until some time in the future when they actually go to apply. That’s an oversight. As long as the debt is paid and it all gets fixed up and there’s an explanation as to why, that will often be viewed favorably still by a lender.
But if there are things you’ve done wrong in the past and you have defaults, yes, they will sit there. Bankruptcies will sit there up to seven years, so it affects your record up to a period of seven years.
Kevin: That explains a lot to me because I’ve heard people say that they’ve missed a phone bill, for the sake of $20 or $40 or whatever, that they were not even aware of and that it’s actually affected them getting their home loan. Could it be that simple, or is it sometimes a bit more?
Andrew: The default response will be no, and then what we need to do is just a little bit more work around “Why did that happen? What were the circumstances? Was it an oversight? Had you moved address and for some reason, the mail didn’t forward on? Were you in a dispute and then you won it but it still got defaulted or recorded in error?” There’s a whole range of things that happen in our lives that might result in these things.
If you’ve done the wrong thing, well, that’s just going to be the fact of life that you’re going to struggle to get access to finance with most of the major lenders and second and third tiers. But if you’ve done the right thing and it was in dispute or there was an oversight or something like that, generally as long as we can provide a valid reason for it – you might have been overseas for six months and just didn’t get to it or the direct debit changed or your credit card was nicked and you got a new card – there are all these things now with direct debit and things like that are an oversight more than a default as such.
Kevin: Great stuff, mate. Just give me that website again.
Andrew: Veda Advantage or Veda Australia, I think it might be now. There’s also the website My Credit Score that you can do without paying. They’ll put a number on there, a numeric graph based on the stats you put in. Or if you actually want to get your credit file, it’s Veda Australia.
Kevin: Okay. Andrew Mirams from Intuitive Finance. More good advice there for you.
Andrew, thanks very much for your time.
Andrew: My pleasure, Kevin.