When it comes to applying for an unsecured loan (business or a personal loan), you’re bound to undergo a thing known as a credit check. This is a form of protection that the lender has to undergo in order to ensure that a borrower is, indeed, credit-worthy. Seeing as how the lender in question isn’t using the collateral to vouch for them, the only financial insulation that the lender has access to is their credit score. What this means is that they’ll study the history of a lender and use a battle-tested formula in order to determine the likelihood that they’ll see their money back. Based on this, the borrower will get more or less favourable terms.
Nowadays, the majority of lenders are switching from the outdated checkered credit report to a more sophisticated version known as comprehensive credit reporting. Here are several things you need to learn about this concept before you find yourself in a scenario where you have to apply it.
Negative vs. positive
In the past, the majority of lenders in Australia used a traditional credit check as a safety precaution, where the negative aspects were most predominant. In other words, what they were looking for were flaws in one’s credit history. For instance, we’re talking about missed bills, missed credit card payments, defaults or bankruptcy. While this may sound logical, you need to keep in mind that some of the most successful people in history went bankrupt at one point in their past. Allowing this to stop them would have a serious impact on both the economy and the world that we know today.
This is where the new system (the comprehensive credit reporting) comes in. This model compels lenders to assess risk by using a fuller picture on the potential borrower and their credit history. For instance, this also includes looking into the number and nature of their accounts. How many of these accounts have been opened and closed in the past, the date on which they paid their debt after receiving default notices and much more? How well they meet their repayments is another factor worth looking into. In other words, you get a much clearer picture of who you’re lending your money to.
What does it affect?
The next thing worth investigating is the effect of comprehensive credit reporting. So, what does this report actually affect? First, it determines whether they’re going to lend them the money in question, to begin with. Second, it affects how much the lender is actually willing to lend. The more money they lend, the greater the risk. Third, in a lot of scenarios, it affects the interest rate, which is perhaps the main concern of the majority of people who apply for a loan, to begin with. For a potential borrower, this creates far more favourable terms, as well as gives them a chance to get a much better deal than they would usually get.
Another reason why this is so important is due to the fact that’s it’s not nearly as punishing for the people who have had a blunder or two in the past but are now more than capable of handling a loan. With a traditional credit score system, just a couple of missed (or even late) payments could completely ruin your credit score. In other words, it helps out both the lenders and the borrowers, seeing as how it expands the potential client pool for the first and makes the latter far more competitive.
Understanding the credit score
The next thing you need to understand is the very concept of the credit score. Now, there are various scales and diagrams across which you can track your current situation regarding the credit score. The most commonly used system is the so-called FICO score, which awards you a score between 300 and 850 based on various metrics. Here, 300 is considered abysmal while 850 is considered to be an extraordinary credit score.
Speaking of the credit score itself (FICO credit score in particular), it’s crucial that you understand that the majority of financial institutions use five metrics to establish it. About 30 per cent of your score is determined by the amount of money that you have owed in the past. Somewhere around 35 per cent of the score is your payment history (how reliable you were in the past). Nearly 15 per cent of the score is determined by the length of your credit history, whereas the credit mix (number of credit types) and the new credit that you’re inquiring about making about 10 per cent each.
With that in mind, you will be able to tell exactly where you stand, nonetheless, it might be for the best to skip online calculators and your own equations altogether. Instead, you might want to look for professional comprehensive credit reporting and get the exact figure that you’re looking for.
Be careful when you apply
The first things that people ask about comprehensive credit reporting are its dos and don’ts. What this means is that you only need to apply for credit when you need it and have adequately researched all your options. One of the worst things you can do (something that will ruin your attempts the fastest) is applying for credit repeatedly over a short period of time. In other words, it’s far better to take one large loan than to just apply for a series of smaller online loans.
Naturally, there are a couple of tips as well as hacks to get around this. If you already have many such loans, it might be for the best that you apply for a consolidation loan. This will allow you to focus on a single loan, rather than forcing you to handle a plethora of loans. Another thing that this does is minimizes the chance that you’ll miss out on a payment. Second, if you’re unsure about how much money you’ll need in the nearest future, it might be for the best that you apply for a line of credit instead of just taking a one-time loan (several times over).
Why is it better?
There’s a statement that claims that you shouldn’t trust words, that you should question actions but that you should never doubt patterns. Well, this kind of modernized approach to the question of credit score can allow financial institutions to do just that. Instead of putting too much value into instances and minor mistakes, what it provides these lenders with is an opportunity to put their trust into something far more reliable.
The three major advantages over the traditional point of view are the fact that it’s fairer, more balanced and, as we’ve already mentioned, based on patterns of behaviour instead of instances of behaviour. While to some, it may seem like a transition that is meant to help the borrowers, the truth is that lenders get to benefit just as much.
Most important criteria
The two most important criteria, when it comes to comprehensive credit reporting are A) your frequency of applying for a credit (which is something that we’ve already discussed) and B) the total amount of credit available. Now, before we carry on, it’s vital that we clarify one thing. First, we’re not talking about the amount of money that you have in your accounts or a balance on your credit card. What we’re talking about is the maximum available limit on the card, that really counts. The above listed two criteria are one more reason why debt consolidation is one of the best things you could do, at the moment.
Stay up to date and don’t switch your credit card providers
In the past, there were some systems which counted regular checkup of your credit score as a negative metric that could, potentially, lower your score. Fortunately, this is no longer the case. You see, your credit score is a living, breathing thing and in order to make it work in your favour, you need to ensure that it’s alive and well. It evolves and what you need to ensure is that it evolves in the right direction. Keep in mind that it is also quite likely that someone, somewhere might make a mistake. This way, you can spot the error in question from a mile away and alert the responsible parties. Other than this, you might move or change some other personal info. In this scenario, you get to update this contact info in time.
Like in many different areas, there’s one thing that institutions value the most and that’s loyalty. What this means is that changing your credit card provider every several months or every couple of years isn’t going to create a nice picture of you in the eyes of potential lenders. Sure, it’s tempting to change your providers every 12 to 18 months, especially seeing as how the potential provider is willing to offer you a nice incentive in order for you to make this switch. The problem lies in the fact that this will hurt your odds of getting credit in the future (at least getting a favourable one).
Consumer liability credit information
The next thing you need to understand is the fact that one of the crucial aspects of comprehensive credit reporting is the so-called, consumer credit liability information. These are the type of credit account opened, the date the credit account was opened, the name of the credit provider and the current limit of your credit account. The more you tend to these, the better your odds at making it will be.
Apart from this, there’s also the importance of repayment history. To some, it may seem as if we had downplayed its significance a bit in some of the previous segments. The truth is that it’s still just as relevant, the biggest difference lies in the fact that the creditors now take a slightly different approach to this phenomenon, as a whole. The emphasis is on repayment history for credit accounts, the difference between a payment and a minimum payment required, as well as whether the payment was made in time or not. As you can see, not that much has really changed.
It’s more important than you think
One of the things that we just have to mention is the fact that your credit score isn’t just relevant for your ability to get a favourable loan. In fact, it’s something that affects a lot of different aspects of your life. For starters, it affects your ability to get a better insurance premium. Second, when applying for a job in finance (or a financial department within a company), your employer might do a credit check on you before deciding on whether to hire you. A similar thing happens with landlords (in some scenarios). Also, just because you don’t need a loan at the moment it doesn’t mean that it will remain so indefinitely.
What is your optimal course of action?
The very last thing you need to consider is your own behaviour in this kind of situation. As we’ve already suggested, there’s so much that you can do in order to make the situation better for yourself. If you’ve read the above-listed sections carefully, it’s more than clear that you should be vigilant about your credit payments, protect your identity from fraud, keep an eye on all the changes regarding your credit score and personal information and more. Lastly, you need to do your fair share of research before making any financial decision.
The last thing you need to understand is the fact that in Australia, this kind of credit report was voted out but the majority of credit unions and big banks simply had no way of adopting it right away. This is why bank assumed a tad more lenient approach and allowed about 50 per cent of them to adopt it by the year 2018, while everyone had to start applying it by the July 1st of this year. In other words, although you might have checked your credit score recently, the criteria by which it’s evaluated might have changed. So, it might be worth your while to check it once more.