Many people can relate to the unpleasant experience of having a loan rejected, which they felt certain lenders would approve. Before you can understand why it might have happened, it’s essential to know what factors help make up your credit rating.
How You Receive a Credit Rating
When you apply for a home loan, car loan, credit card, or any other type of credit or finance, the prospective lender requests a copy of your credit file as part of the application process. This contains an information and a score that lets the company know whether you are a good credit risk or not. Some of the factors that influence your credit rating include:
- The types of credit previously sought, your previous applications to other lenders and providers over the last 5 years. Typically, the last 12 months.
- The amount of applications in a specific timeframe per the lenders specific lending criteria.
- Your repayment history on all accounts, including personal loans, credit cards, mortgage, utility bills, and business loans.
- The presence of adverse information such as Payment Defaults, Court Actions, and Bankruptcies.
The exact algorithm used to calculate your score is complex and is privy to the Credit Reporting Bodies. Records of other loan applications you made stay on your file for five years. However, each creditor assigns you its own internal credit score. That means one company could turn you down as high risk while another has no issues with your past payment performance. This will change dependent upon the lenders criteria.
Possible Consequences of Having a Low Credit Score
Negative or Adverse entries on your credit report, such as slow payments, defaults and or bankruptcy, lowers your credit score, while prompt payments and a history of job stability has the potential to increase your overall score.
Repayment History Information (RHI)
A payment made more than 14 days past its due date remains on your file for approximately two years, so it’s important to ensure that you pay your bills on time. RHI does not apply to Utilities and Telecommunications Companies. It is also important to note that comprehensive credit reporting is an opt-in system and not all credit providers will elect to share positive information. Therefore, you may see information from some lenders and not others
Information in Your Credit Report Is Not Always Right
It’s possible you could get turned down for a loan or charged a higher interest rate based on wrong information. Credit Reporting Body Veda only corrected 0.4% of the data they hold of their own accord, which when you think of the some 30+ million credit files they hold, this seems miniscule, as Veda’s value is in their data, the more they hold the better for Veda.
Types of Corrections made by Veda
- Default Information – 21.28%
- Judgments – 13.17%
- Identification (Name, DOB, Address, Cross Referenced files, Possible Match files) – 15.39%
- Personal Insolvency Information – 0.25%
- Court Writ & Summons – 0.10%
- Public Record (Directorships, Previous Directorships) – 0.29%
All Australians are entitled to receive a free copy of their credit report each year. This gives you the opportunity to check for errors and request that the reporting agency correct them. Another thing to keep in mind is that creditors can charge you higher interest rates based on the contents of your credit report, including your individual scores.
Don’t shop around as this can build up the number of enquiries you have in a 6-12-month period, know what you want; and ask the questions before you sign or tick that box to ensure that you don’t hurt your chances when applying for credit.