car finance credit score

Car Finance and Your Credit Score: What You Need to Know

Car finance can be a fantastic way to get the car you need, but it’s essential to understand how your credit score impacts your ability to get approved. Your credit score is one of the most critical factors that lenders consider when reviewing your car finance application. Here’s what you need to know about car finance and your credit score.

  1. Your Credit Score Affects Your Interest Rate

One of the most significant ways your credit score impacts your car finance is through the interest rate you’re offered. Lenders use your credit score to assess the risk of lending you money, and if you have a high credit score, you’re seen as a low-risk borrower, and you’ll typically be offered a lower interest rate. Conversely, if you have a low credit score, you’ll be seen as a higher risk borrower, and you may be offered a higher interest rate or even be declined for car finance.

  1. Late Payments Can Damage Your Credit Score

Payment history is one of the most important factors that affect your credit score, and late payments can significantly impact your score. If you make late payments on your car finance, it can lower your credit score, making it more difficult for you to secure future credit.

  1. Applying for Too Much Credit Can Lower Your Score

Every time you apply for car finance or any other type of credit, it can lower your credit score. When you apply for credit, lenders conduct a hard inquiry on your credit report, which can lower your score. If you apply for too much credit at once, it can have a more significant impact on your score.

If you’re looking for car finance Sunshine Coast, it’s essential to understand how your credit score can impact your chances of getting approved. At Journey Finance, we work with a range of lenders to help you find the best car finance deal for your situation, regardless of your credit score. Contact us today to learn more and get started on your car finance journey. Our team of experts can guide you through the process and help you find the car finance that works for you.

It’s important to keep your credit score in good standing by making timely payments, avoiding too much credit at once, and taking steps to improve your credit score over time. With the help of Journey Finance, you can find the right car finance deal to help you get on the road and start living life to the fullest.

1800 861 009


car finance sunshine coast

How to Improve Your Chances of Getting Approved for Car Finance

Car Finance Sunshine Coast

If you’re in the market for a new car, but don’t have the funds to buy it outright, car finance can be a great option. However, getting approved for car finance isn’t always easy. Lenders have strict criteria they use to determine whether or not you’re eligible for a loan, and if you don’t meet those criteria, you may be turned down.

Luckily, there are things you can do to improve your chances of getting approved for car finance, even if you’re in a tough financial situation. Here are some tips to help you get started:

  1. Improve Your Credit Score

Your credit score is one of the most important factors lenders consider when determining whether or not to approve you for a loan. If your credit score is low, you may be seen as a risky borrower, which can make it difficult to get approved for car finance.

To improve your credit score, make sure you pay all of your bills on time and in full, keep your credit utilization low, and avoid applying for too much credit at once.

  1. Save for a Down Payment

Lenders may be more willing to approve you for car finance if you can put down a larger down payment. This shows that you’re committed to the loan and that you have some skin in the game.

  1. Choose a Reliable Vehicle

Lenders may be more willing to approve you for car finance if you choose a reliable vehicle. This reduces the risk of defaulting on the loan, which makes you a more attractive borrower.

  1. Shop Around for the Best Deal

Don’t just accept the first car finance offer you receive. Shop around and compare rates from different lenders to find the best deal for your situation.

If you’re looking for car finance Sunshine Coast, Journey Finance can help. We offer a range of car finance options to suit your needs and budget. Contact us today to learn more and get started.

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1800 861 009

 


How to get financed approved with a bad credit rating

If you have bad credit, getting approved for a car loan can be more challenging, but it’s not impossible. Here are a few things you can do to increase your chances of getting approved for a car loan with bad credit:

  1. Shop around for bad credit car loans: Some lenders specialize in bad credit loans and may be more likely to approve your application.
  2. Make a larger down payment: A larger down payment can show lenders that you are financially responsible and can lower the amount you need to borrow, which may make it more likely that you will be approved.
  3. Get a cosigner: A cosigner with good credit can increase your chances of getting approved for a car loan, as they can help to offset the risk of your bad credit.
  4. Improve your credit score: take step to improve your credit score as much as you can before you apply for the loan. This can include paying off outstanding debts, disputing errors on your credit report, and avoiding new credit inquiries.
  5. Provide proof of income: Lenders will want to see that you have a steady income and can afford to make the payments on the loan.
  6. Have realistic expectations: If you have bad credit, you may have to pay a higher interest rate than someone with good credit. Be prepared to pay more for your car loan.

By following these tips, you may be able to increase your chances of getting approved for a car loan with bad credit. However, you should keep in mind that even with these steps, getting approved for a loan with bad credit is not guaranteed, and you may need to consider alternative options.

It’s always better to try to improve credit score before applying for any kind of loan, and also be aware of the terms and conditions before signing a loan agreement. It’s important to also be honest with yourself and the lender regarding your financial situation, and be mindful of taking on too much debt and falling into a cycle of high-interest loans.

The team at Journey Finance are experience dealing with people and bad credits, for more information please feel free to read ‘Getting finance with poor credit’ or contact our team on 1800 861 009.

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Declined

Been declined for finance

Been declined for finance?

Being declined for finance can be extremely hard to cope with both emotionally and financially.  You may have had your heart set on a new car, a house or just to get a personal loan for a holiday, so dealing with the feelings of rejection can be difficult.

All humans go through stages of accepting changes in their lives.

 

Some people will move through the change curve very quickly, others will dwell in certain parts longer depending on the change and how it impacts them.

It’s natural to feel confused, or even disbelief when you are denied finance – the key is to get through the emotions that will prevent you from moving forward.

Get angry?

Getting angry at your bank or the broker when your finance application is rejected may feel natural or even justified, but listening to them to understand what has contributed to the decline is important.

The finance industry is in constant change, in Australia with the onset of the Banking Royal Commission huge changes occurred that put responsible lending criteria at the forefront to attempt to ensure that people who could afford to repay a loan with no adverse effects on their credit file got the loan they were seeking.  The general public welcomed the Banking Royal Commission, but aren't as happy with the changes that have occurred from the investigation.  COVID-19 brought in another series of challenges with uncertainty with employment.  All of these factors come into play now and with this changing landscape, the rules around finance have changed.

Getting to “DECISION”

Through the anger and depression phases of change, some people will continue to apply for finance.  The old saying “doing the same thing over and over and expecting a different result is the definition of insanity” is true!  If you think of lenders in this regard

Prime lenders:  Those who offer great interest rates and terms

These are the hardest to get approved through. They want LOW risk clients who they know will pay on time and in full.

Sub Prime lenders:  Those lenders who have higher interests rates and more restrictive terms

These lenders offer loans to riskier clients and charge a premium (in fees and rates). 

The goal should always be to get a loan with a prime lender as the loan will be cheaper. Some people will move from a rejection from the prime lender to begin to apply for loans with Subprime lenders.   Their goal is to be accepted and to rid themselves of the feeling of rejection along with still wanting the item they were applying for.  We all know how it feels when we are approved for a loan - we feel worthwhile and a functioning member of society - the opposite feelings can emerge when we are declined.  Remember, being rejected/declined is hard, but keeping your head during this time is so important.  Each time you apply for a loan, you end up with an inquiry on your credit file.  We have witnessed files with 30+ applications in as little as a month. The more you apply in short periods of time, the worse your credit score (risk profile) becomes.

How to get to DECISION

If you have already applied and been declined, the first step is to ask why you were declined.  Some lenders will say “Your profile doesn’t meet our credit policy”.  That’s all they’ll say.  It’s a good idea to ask for their credit policy as most lenders will have a document that outlines all the tick boxes they require to lend.

Example:

  • Employed full time or more than 20 hours per week
  • Employed more than 12 months in the role (or show continuity)
  • No defaults or late payments
  • Stable residential history
  • Stable employment history

Once you understand what the policy is, then you can work on the tick boxes that potentially have an “X” against it.   It may take time, but it is worth it.

Getting to the DECISION stage can be hard.  It means not taking the decline personally.  You may think you are a perfect candidate for a loan, but the lender is a business, they aren’t obligated to lend you money.  Their policies are designed to protect their business, their employees and shareholders.  If every bank just lends money to anyone, you can imagine how our society would be.

Getting to the DECISION phase is about understanding what’s in your control and what is not, then taking action to make the changes required.

Defaults or poor conduct on loans

One of the biggest reasons for finance declines is poor repayment history on loans.  Your credit file now records both negative and positive events.  Negative events can be defaults, late payments or bankruptcies.   What is not understood is the type of loan you are applying for can also negatively affect you.  PayDay loans that you see advertised on TV demonstrate to prime lenders (lenders who offer really low interest rates) that the applicant is a potential risk.   It may seem innocent to take a small loan out, but considering how this will affect the ‘snapshot’ you present to another lender is important.  If you’ve been declined by a prime lender, sometimes the only option is to go through a non prime lender, but fixing the issues on your file should be the first consideration. It may take longer and you may need to be patient, but it is worth it.  If circumstances dictate that you have to have the loan now, you may have to accept that you will only be eligible through those non Prime lenders, meaning you are going to pay a premium.

Banking conduct

Most lenders now want to see your bank statements.  In the past, you would download them and send them through to the lender, but now, this is all done electronically.  The financier will request your bank statements and if you want to get the loan, you need to provide them access.

Why do they do this?  In our experience, people either grossly under or over estimate their living expenses.  Calculating living expenses is really important to a lender as it shows whether you have surplus funds to be able to pay the loan back.  Just saying that you will isn’t enough, the lender wants evidence that you can – hence the request for bank statements.

What is shown in these reports?

Lenders will see your daily habits of spending, your regular income as standard.  They will also see how much you spend on things like

  • Take away food
  • Eating out
  • Gambling
  • Alcohol
  • Payday loans (or short term loans)
  • Fines
  • Loan repayments
  • Cash withdrawals (locations including pubs/clubs/gambling locations)

If you have left out items in your application or underestimated (accidentally or purposefully) there will be no hiding it.  Lenders usually want 90 days of bank statements, so before you apply for a loan, it’s a good idea to sit down with your own bank statements and see exactly what you are spending and on what.  If you find that you don’t have good conduct, spend 3 months fixing this.  What you will find is that when you tighten your budget, your finances can take a miraculous 180 degree turn and hopefully, not only will you be more in control of your finances, but you will demonstrate clean banking conduct.

Stable employment

For someone who has just got a job, the first thing they want to do is improve their lives. A new outfit, a new car or even a new home.  Lenders will look favourably on someone who has been in stable employment for a period of time or demonstrate if they have left an old job, that they have moved for a good reason. (eg. More money, career progression).

If an applicant changes jobs every 3 months, it can demonstrate risk.  The lender doesn’t know you or you circumstance and can’t be expected to delve into those depths.  Bottom line, if you’ve been in a job for 3 months and have a 6 month probation, it may be best to wait until your probationary period is over as employers can move you on during that period and lenders know this.

Champagne on a beer budget

If you have an income of $45,000 per year and you are applying for a loan of $50,000 you may need to adjust your appetite!  There is no hard and fast rule around this, but lenders have a formula that looks at what the average living expenses are for a single, coupled, and dependent family and calculate this themselves, regardless of what you have told them you actually spend.  This is part of responsible lending.  So, if you take home $1,000 per week, your living expenses are calculated at $700 including all costs, which means you have $300 leftover.  This is called the income-to-expenses ratio.  This ratio is important as the lender will look for a buffer in case things go wrong and will include the repayment on the loan.  If you are wanting to borrow too much, this will reduce the ratio to the point of a decline or the lender may impose a maximum lend.  (the most they are prepared to lend out)

Getting finance pre-approved and working with your broker on this will mean you are not disappointed if you had your heart set on a certain amount.  Adjusting your expectations can invoke the change curve again – but, over time you will see it was probably the best thing that could have happened.

Financial counsellors

If your finances are not in check, it may be time to seek help.  There are free financial counsellors who can help with budgeting and set you on a good path.  It may be surprising to you, but according to MoneyMag  86% of Australians do not know their monthly expenses.  Putting it down on paper with a professional and beginning the process of putting your money in order can be an amazing first step.  Use our easy tool to calculate how much you are actually spending verses your income.

Final thoughts

When applying for finances, it shouldn't be a 'suck and see'.  Working with a good broker means they will assess your situation and advise the best place to put the loan.. if at all.  Good brokers have access to numerous lenders and most will not put a hit on your credit file during this process until you are ready to apply and have all your ducks in a row.

It's really important during this process to tell the whole truth, nothing but the truth.  A good broker is not going to judge you, they are trying to help you navigate the process.  If you are declined, ask why.  If a solid answer isn't given, then it's up to you to take steps to understand yourself.  Getting access to your credit file will be a really good first step.  If there are issues on that file, you can seek to have them corrected.  If your score is low, then working to fix it over time will mean that you are on a good path to good credit.

 

Disclaimer: The thoughts and opinions conveyed on this website are those of the author/s and are of a general nature. Any information provided does not constitute financial or general advice to you from Journey Finance Australia. When considering financial or insurance products, you should seek your own independent advice from a professional.

Get In Touch

1800 861 009

Locations

Melbourne

Brisbane

Sydney

Sunshine Coast

Townsville

Email

[email protected]

 


Computer showing error

How to request a correction on your credit file

Errors occur in every facet of life, every minute of every day.  As good as our credit reporting system is, it is also prone to errors.  This doesn’t mean you cannot have it rectified if it is genuinely an error.

What is the error?

First things first. An individual not paying their bills on time and this being reported on their credit file is not grounds for a correction.  For a good credit file with a good score, we need to pay out bills on time.  We already have credit (borrowed money we don’t have) so paying it back when we say we will is not just the right thing to do, but owning our responsibilities is what makes society work.

A person paying their bills on time and the credit provider made an error or not recording the payment, then reporting a late payment does provide grounds to apply for the correction!

First steps

As with above, really think about whether truthfully the credit provider has made an error, or you didn’t live up to your obligations (forgetting is not a valid reason).

If you come to the point where you accept your role in the adverse entry.. good for you.  That’s part of being an adult.   Pay your bills on time for a period and watch your credit score not just repair, but also grow.

It’s definitely them, not me

If there is a mistake on your credit file or you think there is something not quite right, its’ time to take action and get it corrected.  If you just let it go, it will impact your ability to get credit, get credit at a good rate or with flexible conditions or even get a new phone on a contract!

Step 1 – Get in touch with the credit provider!

Doesn’t matter if it’s a bank, Telstra/Optus, or an electricity company, get in touch and request the same thing.  An investigation into the error you have picked up and a request that your credit file be corrected.   If you have evidence, this should be fairly easy. If you don’t have evidence and are going on hearsay or memory, then you are going to be battling a company that probably keeps extremely good records.

Having a bank statement that shows the dates you paid, or receipts from the credit provider would be extremely useful.  Making sure that the payments align with bills or invoices is also good.  It shouldn’t be up to consumers to have to enter in invoice numbers to ensure their bill is credited, but reference numbers are usually par for the course (especially when it comes to Bpay or credit card payments)  Check you used the right reference number, as this may have meant the money went somewhere it wasn’t supposed to.   You still may have a case if they find the money and accept that you did pay on time, just with an incorrect reference number (who hasn’t done this? Especially when reference numbers can be 10-15 digits long!)

Step 2:

If you have no joy, time to contact a credit reporting agency.

Credit reporting agencies such as Equifax offer a free service investigating the accuracy on your report.

It’s quite simple.

How?

You can submit to Equifax online or by post.

Click here to submit online if you are a consumer

Click here to submit online if you are a commercial customer

By mail

Equifax – Public Access

Equifax Australia Information Services and Solutions Pty Limited

GPO Box 964

NORTH SYDNEY NSW 2059

You will need to include the following identification information:

  • Name
  • Date of Birth
  • Current Address
  • Previous address
  • Driver license
  • Current Employment

You will also need to provide details of the correction required. Please include:

Details of the entry being disputed; including any account reference numbers and the name of the credit provider who listed it.

  • The reason for disputing the entry
  • Any relevant documentation

From Equifax:

The more information you can provide the quicker we can investigate. If you are requesting the correction on behalf of someone else, please also include the requester's (your) details.

From there, Equifax will conduct an investigation and will come back to you with an outcome. You can also appeal the outcome if it’s not favourable or even take it a step further by contacting the Financial Services Ombudsman.  (this info should be included in the outcome communication under “What You Need to Know” Brochure)

How long before the correction is applied?

It can take a few weeks, even up to a month to be corrected, however, companies like Equifax will contact any recipients of your credit report in the past 3 months prior to the correction being made.

Disclaimer: The thoughts and opinions conveyed on this website are those of the author/s and are of a general nature. Any information provided does not constitute financial or general advice to you from Journey Finance Australia. When considering financial or insurance products, you should seek your own independent advice from a professional.

Get In Touch

1800 861 009

Locations

Melbourne

Brisbane

Sydney

Sunshine Coast

Townsville

Email

[email protected]

 


Credit scores from below average to Excellent

How to Improve your Credit Score

 

They know if you’ve been good or bad with your credit.  How? And who is ‘They’?

What is a credit report?

In basic terms a Credit Report is an overview of your financial history, specifically looking at how your conduct has been with loans and in turn how reputable you are with your creditors.  These reports are maintained by Credit Reporting Agencies.

What is on the report?

There is a fair amount of information about you on your credit file.  This can include:

Your personal information:  Full name, gender, current and previous residential addresses (up to 2) your date of birth, driver’s licence number and your current employers name.

  • Bankruptcies:  If you have filed for bankruptcy or had a court judgement against you to do with debt
  • Applications for credit: This will include any loans you have applied for in the past 5 years.  This will include loans, credit cards and store cards.
  • Business information:  Any business you own or are a director for
  • Number of credit inquiries:  When you apply for a loan, this is listed on your credit file even if you aren’t approved for the loan.  This will include applications for the past 5 years for loans, store cards and credit cards.
  • Current credit:  Any providers of finance you currently have credit with
  • Defaults:  If you have not paid an account or bill over $150 and it is more than 60 days overdue, this will appear as a default and remain on your credit report for 5 years, even after payment has been made on the default.
  • Overdue payments:  If the credit provider has been unable to locate you to demand a payment these are known as ‘clearouts’.  Clearouts remain on your credit report for 7 years.

Comprehensive Credit reporting

In the past, only negative data was stored on your credit file. In 2014 the Government introduced Comprehensive reporting that showed your good credit history as well.  It still includes any negative credit history but if you have good credit conduct, it shows on your credit file.

Credit scores

With the full view of your credit file, you will end up with a score.

Using Equifax scoring system (formerly known as Veda Advantage) your score will range between 0 (never had credit or had serious misconduct) to 1,200 being excellent.  The lower the score the MORE likely it is that the borrower will experience an adverse event that will harm their credit in the next 12 months.  The higher the score, the less likely it is.

 

These are the top 20% of borrowers in Australia.  These are the least likely (highly unlikely) to experience an adverse event that may harm their credit file in the next 12 months.

According to Equifax – people with a Very Good score are twice as likely as those with a score in the AVERAGE range to experience an adverse event that will harm their credit file in the next 12 months.

It stands to reason that consumers in this range are more likely to keep a clean credit report in the next 12 months and are less likely than average and below-average to experience an adverse event that will harm their credit file in the next 12 months

Consumers in this range are likely to experience an adverse event that will harm their credit file in the next 12 months.  These adverse events could include a default, bankruptcy or court judgement in the next 12 months.

Consumers in this range are highly likely to experience an adverse event that will harm their credit file in the next 12 months. Similar to average scores, this band of people are likely to experience a default, bankruptcy or court judgement in the next 12 months.

What if I have a bad credit score?

Some lenders will not lend to people with a score below a certain threshold.  This is why it is important to use a broker. A Good Broker will check your score first rather than just apply and hope for the best without affecting your credit file!

If your score is lower, a Good Broker knows where they can send the loan and who is likely to approve it based on all of your circumstances.  It's important to understand that if you have a bad credit score, it's not for no reason!  You may think that another loan is going to help you out of trouble, whereas budgeting and paying your existing bills on time of completely paid off should be your goal.

Seeking the assistance of a financial counsellor may be a great start for you if you are trapped in debt.

 

Things that affect your score positively

It seems simple but paying your bills on time or early in the full amount will positively affect your score.

Not applying for too many loans in a short period also assists along with keeping your debt to credit ratio as low as possible.  This could mean lowering your credit card balances/limits and also paying them off each month will help immensely.

Of course, regularly checking your credit file (at least once per year) to ensure there are no errors on your file is also really important.

Things that affect your score negatively

It stands to reason the opposite applies to positive conduct.  Missing payments, not paying bills in full or on time, maxing your credit limit, having court judgments or clearouts, making multiple credit applications in a short period of time are all things that can negatively affect your score.

Not checking your file regularly will also mean you don’t pick up on any errors that may be on your file, or even worse, ignoring errors or inaccurate entries on your file

Improving your score

Basically, using the recipe above to positively affect your credit score is a great start. It will take time but your score will gradually improve.

One of the biggest mistakes that people make when they get into trouble financially due to tough or unforeseen circumstances is not contacting their lender to talk about it.  Putting payment arrangements in place or even having a payment hold for a period could help you immensely and keep your relationship strong with your current lenders for when you exit the circumstances.

 

How to check your score

The first thing to do is run your credit file. You can get this for free through a variety of credit reporting agencies:

Equifax

https://www.equifax.com.au/personal/

Experian

http://www.experian.com.au/order-credit-report/

Illion

https://www.checkyourcredit.com.au/

If you find errors or inaccuracies, you should get in touch with the credit reporting agency to see if it can be rectified. Fixes can take time to appear on your file, so don't expect it to happen overnight.   Your broker will also be able to provide you some guidance in this regard.

Journey Finance credit check

Journey Finance as part of our process will run your credit score.  If you are looking for a loan, we can do this work for you and provide you this for as little as $19.95 or free if your loan goes through us.  Contact us today.

 

Disclaimer: The thoughts and opinions conveyed on this website are those of the author/s and are of a general nature. Any information provided does not constitute financial or general advice to you from Journey Finance Australia. When considering financial or insurance products, you should seek your own independent advice from a professional.

Get In Touch

1800 861 009

Locations

Melbourne

Brisbane

Sydney

Sunshine Coast

Townsville

Email

[email protected]


Credit scores

How do credit scores work?

 

How do credit scores work?

Borrowing money to buy things like houses and cars means you are taking on significant debt to acquire items for your life.

For the initiated, when you take a loan out for an asset, the lender adds interest to the loan which is an amount above the amount you borrowed as a fee for lending the money.

It’s like borrowing a car with half a tank of fuel, when you return it, you will fill the tank up.

Lenders of money such as banks, building societies, credit unions or non-traditional lenders take on risk to extend the loan to you.  The risks could include:

  • You may pay the loan back late
  • You may default on the repayments (not pay at all)
  • Your circumstances may change
  • You may lose your job or ability to pay
  • The market conditions may change

How are interest rates determined?

Without getting into too technical an explanation, the ‘cash rate’ is set by the Reserve Bank of Australia.  They meet each month and their role is to assist the overall economy to provide the growth needed to make everyday Australians lives better.

The Reserve Bank doesn’t lend money to you and me, nor does it have branches or ATMs, but the Reserve Bank looks at what is happening in the economy and adjusts ‘monetary policy’ in accordance with those things.

For example, if inflation is too high (prices are going up too fast or not at pace with wages) the Reserve Bank will adjust up the Cash Rate (% it lends money to banks) to slow our spending. (we spend more on mortgage repayments)

Alternatively, if inflation is too low it usually means there is not enough spending going on, so interest rates are lowered in order to stimulate spending in the general economy

There are many factors that determine the Cash Rate

  • Unemployment rate
  • Inflation
  • Wage growth
  • The Australian dollar (value against other currencies around the world)
  • Australian household debt
  • The Consumer Confidence Index

The RBA meets each month to look at a target of inflation of around 2-3%.  They will look at everything from what a litre of milk costs to the price of petrol to see what is happening in the economy broadly.  It then sets that months monetary policy accordingly (as talked about above)

In the 1980’s, Australia’s banking industry was deregulated meaning the government has less control and the market began to manage itself.  In theory, this creates competition and drives up the quality of service delivered as well as innovation. The RBA was no longer government-controlled and acts independently of the Government.

What has this got to do with credit scores?

Now we know how interest rates are set, we can start to understand how those rates are then passed onto to us the consumer.

We’ve already talked about risk.  This is a big factor.

Think about it this way.  If you had $100 to lend out and you had 3 applicants.

 

Applicant 1: 

Has been in a job for 3 years full-time.  Has a mortgage they are up-to-date on payments and never missed a payment.  They have a car loan also up-to-date with excellent conduct on the loan.  They save every pay and don’t spend more than they earn.  They have an emergency credit card with a $1,000 limit.

Applicant 2:

Has been in a job for 1 year and is a renter with no assets, but some savings.  They have a car loan that they have been late on a couple of times over the past few years.  Has a credit card that has a $5,000 limit but a balance of $3,000.  They got a  payday loan 3 years ago due to a problem with their pay/bank account.

Applicant 3:

Has been in their job for 6 months and lives in a share house.  They have multiple loans with a few lenders.  They have applied for a car loan 3 times in the past 6 months and been knocked back. They had a car loan 4 years ago that they defaulted payment on, but caught up the payments before the car was repossessed.  They are constantly late with payments on their existing credit commitments.

Which applicant would you be most comfortable lending your $100 to?

Most people would rank them in the order in which they have been put above. Some would not lend to Applicant 3 at all because there is a history and risk of not being paid back. 

Second consideration – what interest rate would you offer to each of the applicants if you were going to lend to them?  

  •  Would you expect a higher payback from the higher risk applicant?
  • Who would you be competing against for Applicant 1?  What if they offered a lower rate than you?
  • What would be the easiest way to see each applicants risk profile to determine the rate?

Credit Scores

Without every bank knowing each person's personal circumstance, we have what is known as credit scores in Australia.  This score is based on personal and financial information about you that is kept in your credit report.  (this is freely available to you).

How your score is calculated

As mentioned, what is in your credit report determines your credit score calculation.

  • How much money you have borrowed
  • The number of credit applications you have made
  • Whether you pay on time (or at all)

The score is a scale between zero and either 1,000 or 1,200.  The higher the score, the more ‘credit worthy’ you are seen to be.

The actual score then helps the lender work out how risky it is for them to lend you money if they decide to at all, and what interest rate would be offered based on the five-point scale (excellent, very good, good, average, and below-average)

A low credit score could actually affect your ability to get a loan at all.

Knowing your credit score can help you get a better deal with finance, especially if it is a high score!

Setting the rate

With the 3 applicants above, most likely Applicant 1 knows their credit score and the lender will provide the funds at a lower rate than Applicant 2 or 3.  This is not discrimination, this is about risk. The lender is within their rights to determine the risk and to offer a product/service accordingly. When I talked about the market regulating itself, this is what we are talking about.  A person with a good credit score isn’t going to just accept a higher rate, they are going to demand the market adjusts to them.

The higher risk applicant due to their conduct on loans, or the way they have handled money, is going to have less choice and most likely pay more.  The market will determine what the higher risk applicant can have, until the day that the high risk becomes a lower risk, this is how the money market works.

Lenders lend based on risk.  After all, it's their money.  Just like you wouldn't risk losing your $100 by lending to someone where there was a good chance they wouldn't pay you back, lenders base their decisions on risk profiles and act accordingly.

See also: Finance Pre-approvals

My credit score is low – how do I fix it?

 

STOP applying!

One of the most common mistakes we see potential borrowers make is multiple applications.  They will get knocked back with one lender and then go to more lenders.

Each time you make an application, it can drive down your credit score.  If your score is already low, it may come to a point that you are completely undesirable to any lender, no matter the interest rate.  Take a breath and understand that the lending criteria that has been applied to your circumstance is designed to ensure that you aren't over extending yourself. This could be from the serviceability of the loan through to the loan to value ratio of the item you are wanting.

It's tough to accept, but now may not be the right time!

Pay on time

If you want to improve your file, pay your bills on time!  If you can’t pay on time due to a particular circumstance, make sure you are ahead of the game and contacting the lender to make an arrangement. This includes phone bills and utility bills as these are the most common items that people default on – affecting the ability to borrow for things that matter like cars and houses.

Stick to your budget

Don’t over borrow!  Know your budget, stick to it.  Yes, it may be nice to have new shiny things, but if you determine a budget that allows you to save for those items – the future will be brighter for your when it comes to borrowing for assets like homes.

Stay away from pay-day lenders

There are SO MANY lenders in the market place that seem to be offering “Cash in a hurry” or “Access your pay before pay day”, with images of broken fridges or scenarios of the unexpected.

Pay day lending can destroy your credit score in a flash.  A main stream lender will see pay-day loans (especially multiple loans) and determine that you do not save for the unexpected, you don’t stick to a budget and you are a high risk.

What about Buy Now – Pay Later

The basic difference between a buy-now-pay-later lender like Afterpay, Zip-Pay etc is simply that you are paying fees instead of interest. It seems great. Get what you want now, pay later!  Laybuy without the agonising wait.

If you miss a payment, you are charged. If you default, you will end up with a negative mark on your credit history. It also won’t show on your credit file that you pay ontime, so it won’t positively affect your credit score.

Some BNPL services also do a credit check meaning you will have an enquiry on your file. (check with the service to see if they do)   As with the above point, stick to a budget, be disciplined with payments and work out what is more important for your future.

 

Final word

 

The finance market is a competitive place.  If you have a low credit score, you may think it is unfair.  Circumstances in your life have led you to having this score, but with any rating, you have the ability to fix it.  It takes discipline and determination.  There are many professional financial counselling services that can help you set a budget and even assist you in understanding how you can reach you financial goals.  It will be a journey, but it always starts with a step.

 

Disclaimer: The thoughts and opinions conveyed on this website are those of the author/s and are of a general nature. Any information provided does not constitute financial or general advice to you from Journey Finance Australia. When considering financial or insurance products, you should seek your own independent advice from a professional.

 

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