Before you begin applying for a home loan, stop! Take the time to get to know your credit report. This will help you navigate the often-daunting lending process with ease. Too many people don’t understand the details of this important financial report that can make or break their loan application.
The importance of credit reports
A credit report is basically a financial history that is shared between credit providers. This is done each time you make a new lending application or request to increase the value of existing borrowing.
What many people don’t realise is that agreeing to make a formal application includes an assessment of your credit history. Although a person’s credit report is not the only factor that decides the outcome of their loan application, a poor report can lead to a loan being declined.
Besides financial services providers, utility companies also have authority to view and add defaults to credit reports. This means a poor credit report can also affect applications for services such as post-paid mobile phones, internet and electricity.
Knowing that your finance provider will be able to access your recent financial history is a good incentive to keep your finances and payments well organized, especially when you recognize that a good report improves your chances of home loan approval. While a missed payment may not seem like a big deal, it is recorded on your credit report and may lead to your loan being declined.
What’s on your credit report?
The information on your credit report can be divided into three categories:
- Personal information — Including your full name, date of birth, present and past known addresses, and employer details.
- Credit information — Including, but not limited to, loan applications in the past five years, details of current lending, defaults, serious infringements and overdue payments.
- Public record information — Including court rulings, registered businesses and declared bankruptcies.
All this information is used by credit reporting agencies to calculate a total credit rating that will be used to evaluate your application for finance.
In March 2014, Comprehensive Credit Reporting (CCR) was introduced in Australia in order to improve the credit reporting system and provide lenders with more information about applicants.
In the past, only negative financial behaviour was visible on your credit report. With these changes, your credit report may also list positive behaviours. This gives finance providers a more complete picture of applicants, and helps consumers create a positive profile and demonstrate changes to past behaviour.
The new information on CCR’s includes the opening and closing date of accounts, credit limits of loans, type of borrowings, and most significantly, repayment history.
At most, information remains on your credit report for seven years. The most serious financial discrepancies that are recorded for the maximum time include bankruptcies and unpaid infringements. Any overdue but now paid accounts are still recorded for five years. This includes anything over $150 that was more than 60 days overdue, whether it is a mobile phone bill or credit card payment.
Defaults, even those that you pay, are a serious negative for lenders. Should you have trouble paying a bill, simply staying in contact with a finance or service provider can help you avoid defaulting, as they may be able to assist by creating an alternative payment plan.
Check and protect your credit report
Review your credit information as finance providers view this. Check your identification details, credit applications and repayment histories, account information and any defaults or bankruptcies. This can help you identify possible errors, and even catch identity theft.
There are a number of credit reporting agencies in Australia. It is worth checking all applicable agencies. This is because your credit report may vary between them, depending on which have been used by your past and current finance service providers.
You can order credit reports online with these agencies by submitting certain identity documents. You will then receive your report within 10 business days.
If you identify an error in your personal information, such as the wrong name or date of birth, you should report this directly to the credit agency. You need to also report any errors or concerns relating to the credit or public records sections.
If you can’t sort this out directly or you aren’t happy with their response after lodging a formal complaint, you can involve the Credit or Financial Ombudsman.
The more you know about what is on your credit report, the better. It is then easier for you to disclose all information at the time of any loan application. With the recent changes to the credit reporting system, you can also work to improve your credit report through maintaining a good repayment history.
Armed with the knowledge of a positive credit report, you can go into the home lending process with greater confidence.
On the other hand, a few negative marks won’t necessarily count you out for a home loan approval. With this information you can work to change your financial behaviours and prepare to justify your loan application.
Rob Chaloner is the Founder and Managing Director of Stratton, and is passionate about developing smarter ways to buy and finance cars. With Stratton, he’s working to help Australian buyers disrupt the traditional car buying, financing and insurance markets through smarter products and online services.