Let’s talk about why your credit report is so important to your property investment plan, and what you can do about it.
Welcome! Are you giving your credit report enough credit? In recent times, our finance broking team has been surprised by the number of home and investment loan borrowers (who have got great incomes and plenty of equity) see their loans decline by the banks due to poor credit conduct, particularly for those buying over 80% of the property value where lenders mortgage insurance is required.
So today we’re going to do a deep dive on the importance of managing your credit report, given how critical it is to your ongoing financial future. Let me start by asking you a couple of questions. When was the last time you checked your credit report? And what’s your credit score?
Chances are your answers are going to be “never” and “I don’t know.” Now, more than ever, your credit report is going to be absolutely crucial to your ability to obtain credit or to get a loan in the future, because your credit report is a bit like oxygen. It’s invisible, but absolutely critical to your ongoing financial survival.
In recent times, since the introduction of what’s called ‘open banking,’ in conjunction with the comprehensive credit reporting measures, we’ve shifted from what used to be called static credit reporting to live credit reporting. Historically, a steady kind of fall would tally up all of your credit enquiries and would score you accordingly. So, the more credit enquiries that you’ve made, the lower your score. Credit enquiries aren’t limited to home loans or investment property loans. They apply to all financial products, including credit cards, interest-free store cards, car loans, personal loans, as well as telephone companies and utilities, such as electricity companies. So if you apply for a credit card, the bank or credit card provider lists a record on your credit file confirming who you apply to, the credit limit and the date. But it doesn’t record the outcome of whether you were approved or declined. This is where many are making the mistake of applying for multiple credit cards or home loans without realising that every time they make an application, the enquiry is actually recorded on their credit report and the number of credit enquiries impacts on your credit score, and the lenders, your view of whether your credit worthy or not.
Now, static credit reports also lists credit defaults, late payments or overlimit activity, where payments of more than $150 that are at least 60 days overdue and for which you have supposed to have served at least two notices requesting payment, are automatically listed on your report for all to see, and they stay on your report for up to 5 – 7 years.
This is one of the areas that’s catching many unsuspecting borrowers out as late or overlimit payment activity on things like long forgotten interest-free store cards can actually catch you unawares and become an absolute knockout punch when you’re looking to borrow money.
Since live credit reporting was fully embraced and implemented by the major banks a little over 18 months ago, more “positive information” is now included in your credit file, including whether you have a mortgage, your mortgage repayment history going back two years, your credit card limit and repayment history and your repayment history on things like car loans and personal loans. The good news here is that the number of enquiries on your credit file won’t have quite the same impact as it used to, because all of your liabilities, both closed and open, will be reported on and will extend as far back as two years. This also means it’s never been more important to pay your bills on time and in full.
However, the biggest problem with live credit scoring is that even when you close down your credit card or your personal loan or any debt in fact, your previous repayment history lives on taking up to two years to clear off your credit file. So what you need to do to manage your credit file and ensure that it’s not going to bite you on the backside when you go to apply for a home loan or an investment property loan?
The easiest thing to do is to make sure that you pay all the bills on time and make all of your credit payments on time with no late or overlimit activity. Of course, the easiest way to do this is to set up all of your repayments on direct debit so you just don’t have to remember them. Be very careful when you first set up your loans and repayment dates, because it’s not uncommon to think that if your repayments happen on the same day, or soon after you get paid, then you’re going to be all right on payments. However due to the fact that it often takes a couple of days for your income or your wages to clear, defaults can then occur without you realising it, and it’s only when you got to apply for a loan elsewhere that this comes to light and then it’s too late because the damage has already been done.
There are a number of services that will text you on your mobile whenever a company makes an enquiry on your credit file so that at least you’re aware that that’s happening now. The next thing you need to do is get a copy of your credit report, which are able to get for free through some providers and make sure you dispute any inaccuracies on your file.
Unfortunately, it’s not uncommon to have information listed on your credit file that isn’t actually yours, particularly if you’ve got a common name. So if this is the case, then you can get this rectified straight away. And if you find a late payment default that’s been resolved but hasn’t been removed from your credit report and there are a number of credit cleansing companies that are able to rectify this on your behalf. The next thing to do is limit the number of credit enquiries. Again, an overacted credit report sends a subliminal message to lenders that you’re not good at managing your money, so avoid this at all costs and be careful with how some banks trigger their enquiries. One of the major banks who will remain nameless, has a history of triggering a new credit report enquiry every time you make an adjustment to a home loan application. As a result, we’ve seen some borrowers end up with five credit enquiries on their credit report to the same home loan. So you need to ensure that you don’t make too many credit enquiries in a short period of time. As a rough rule of thumb, try to limit your credit enquiries or loan applications to a maximum of about five per year. And remember that this includes any applications to telephone companies and utilities. Again, a trap that we see some borrowers fall into is to make multiple applications to a number of credit card companies chasing zero rate transfers, only to find out that every enquiry has appeared on their credit report that prevents them from then getting a home loan. The next thing to keep in mind in optimising a credit file is to try and avoid changing your job or your address too frequently.
This is actually a little known fact with lender credit scoring that can have a very substantial impact on your ability to borrow. In simple terms, the more you move, the higher chance of a lower credit score. This creates issues because a credit provider may not be able to contact you if you’re late or you’ve missed a payment, and you may not even be aware that this is the case.
So what does this all mean to you? Well, the bottom line is that credit reporting is rapidly changing with quite mixed implications and the banks are likely to use this to their advantage. But you can too, and the better your credit score, the better potential loan rates and terms that you can negotiate and unfortunately, vice versa. With the old static credit reports, if you missed a credit card or a personal loan payment all you had to do was to pay it out and close it down and the problem pretty much disappeared. But with live and open reporting, there’s now nowhere to hide and no escape as your transaction history will remain on your credit report for up to two years. This is giving banks and lenders an opportunity to take quite a black and white approach to your chances of securing a loan. So you need to get on the front foot and proactively gain the system by managing your credit report to your advantage. The best place to start is to get a free copy of your credit file by downloading it from www.mycreditfile.com.au. And of course, reach out to a savvy finance broker if you want to find out what this all means.
That’s more food for thought.
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