In this series of guides we aim to explain how the Australian credit system works. We have worked with some of the experts at MoneyPlace who have years of experience at major banks.
In this guide we get into the kinds of activities – applying for credit cards, loans and other lines of credit – could impact your credit score, and what that means for your credit-worthiness.
Disclaimer: This guide was written by Paul Abbey, Chief Risk Officer of MoneyPlace. Money Place AFSL Ltd holds Australian Credit Licence number 466327. No commercial consideration has been given between Point Hacks and MoneyPlace for the inclusion of this content on the Point Hacks website.
MoneyPlace is changing the way Australians borrow by creating an online personal loans marketplace. It’s like what Airbnb is to hotels, but with loans. Investors make money available in their marketplace, and they find credit-worthy borrowers to lend to.
In our first guide we ran through how the credit assessment process works in Australia and that a key piece of the puzzle is information held by the Credit Reporting Bodies (CRB).
The CRBs are centralised databases holding credit reporting information on consumers and businesses across Australia, outlining their applications for credit, any defaults & public record information (e.g. bankruptcy/judgements).
A Credit Provider will usually report all credit applications to one or more CRBs – this will include new credit cards, personal loans, home loans, rent-to-buy, short term loans (payday) as well as limit increases or refinancing. The Credit Provider will let the CRB know the:
- Date of credit application
- Who the credit provider is
- Amount of credit applied for
- Type of credit applied for
With this information lodged against the customer’s credit file, it is stored as a credit enquiry by the CRB.
Crucially the Credit Provider does not have to let the CRB know the outcome of the application.
The application could have been approved or rejected by the Credit Provider or the customer could have withdrawn their application, but in most cases only the credit enquiry will be shown on their credit file.
Some Credit Providers are beginning to share more details (including what accounts customer has – more on this in a future topic) with CRBs after updates to the Privacy Act in March 2014, but industry uptake has been slow so far.
What does this mean for a consumer’s bureau files and credit scores?
As the CRBs & Credit Providers can only see credit enquires & default information in most cases, this places greater emphasis on these pieces of information. This means that the type of credit applied for, amounts applied for and frequency of credit enquiries can have a significant influence on how a new application for credit is assessed.
Let’s see how this could play out, with two neighbours with similar circumstances but a very different approach to points.
Customer A:
| Date | Product | Amount |
|---|---|---|
| 1/03/16 | Credit Card | $10,000 |
| 29/02/16 | Credit Card | $15,000 |
| 20/02/16 | Credit Card | $7,000 |
| 15/02/16 | Credit Card | $20,000 |
Customer A loves points – having seen a number of sign-on bonuses with credit card providers, they have decided to apply for multiple products in a short space of time.
However, applying for a number of credit products in a short space of time signals that the customer could be: –
- struggling financially and needs a lot of additional credit
- Applying for credit cards and being declined by Credit Providers, so trying multiple providers in a short time frame
- Trying to defraud credit providers
Why would Credit Providers think of these reasons? Simply they do not know whether these accounts were opened, the customer decided not to proceed with the application or if they were rejected. They can’t tell that someone was shopping around for a good deal, trying to load up on points, or is in need of credit because they are in financial hardship.
Customer B:
| Date | Product | Amount |
|---|---|---|
| 7/09/15 | Credit Card | $8,000 |
| 1/02/15 | Home Loan | $410,000 |
| 7/06/13 | Credit Card | $15,000 |
Customer B is less focused on points – their credit file as a result looks quite different, and the length of time between enquires suggests the customer isn’t overly credit hungry.
Customer A isn’t an extreme example – it is relatively common for people to have a significant number of credit enquiries in a short period of time. Remember that credit enquiries remain on a credit file for 5 years.
Credit enquiry information is just one part of the picture for CRBs and Credit Providers as they will take a holistic approach to understand someone’s overall risk level, with different aspects of the application having differing levels of impact.
Before applying for a credit card for some bonus points, it is worth thinking through the potential impact to their credit file too.
Shopping around for credit can leave lots of credit enquires on someone’s credit file – some loan providers like MoneyPlace allow people to understand what interest rate they are eligible for, without leaving a credit enquiry on their file. This puts consumers back in control to make an informed decision and get a better deal.
Coming next: The upcoming changes in the credit reporting system
How Credit Works Series
- Part 1: The credit card assessment process
- Part 2: How loans and credit card applications could impact credit scores
- Part 3: The upcoming changes in the credit reporting system
- Part 4: Managing your credit – our key tips
Does applying for a loan affect my credit file? What kinds of activity is on my credit file?
When you apply for a loan from us, and by submitting the full application form, we may obtain a copy of your credit file. By doing so we also advise the credit reporting body that you have made a loan request with us. This information gets recorded on your file.
If you subsequently apply for another loan, a credit provider will be able to see that you applied for a loan with us. This is different to when you only receive a rate estimate with us, because this information is not disclosed to other lenders.