For a mortgage broker, there’s nothing more frustrating than spending time preparing and submitting an application, only for the lender to decline it due to a credit problem.
What can often add insult to injury is learning the problem in question is something quite small – such as a paid default to a phone carrier – that could have even taken place years before.
For your client, this can be very difficult to comprehend; after all, such a listing may not represent their current financial position or ability to service a loan. Being refused finance can be a highly confronting event for a client – and it can often breed a feeling of distrust towards the broker. Many start to ask the question: “Does this person really know what they are doing?”
This suspicion can be a very hard position for a broker to recover from. Ultimately, it could lead to the loss of the client. It’s crucial that brokers understand credit scoring and, particularly, how different events impact on a client’s credit score.
Veda Advantage, the credit-reporting agency, has developed a new credit scoring system, Veda 1.1. The system takes many factors into account, including a client’s previous credit enquiries and negative listings, their age, employment history and even changes of address. The programming behind this system is a tightly guarded secret, with very few people fully understanding the mechanics.
However, some general principles can be explained. Credit scores start at -200 and finish at 1200 – the lower the score, the higher the perceived risk. A score of 200 represents odds of 1:1, which equates to a person having a 50% chance of having an adverse event on their credit file within the next twelve months. The odds double with every additional 100 points, meaning a person has less chance of experiencing an adverse credit event (please refer to the graph).
|VedaScore 1.1||Good bad odds||Chance of adverse on file in next 12 months|
For example, a person with a credit score of 300 would have a 33% chance of having an adverse credit event within the next 12 months. They will not have an easy time securing finance. Even a score of 400 reflects a 20% chance of trouble, so that would likely be too much risk for a lender in the current market. Of course credit providers carry their own policies and what might be acceptable to one might not be to another.
So what can be done about this? Unfortunately there is no simple answer, the state of the world’s economy and in turn the Australian financial markets would suggest that restrictive lending policies will continue for some time.
Credit reporting in Australia is very much a “guilty until proven innocent” process given as soon as a negative item such as a payment default is recorded the individual’s credit score will be negatively affected, even if the listing is incorrect. This situation often results in a person being financially disadvantaged for years. Even though Veda Advantage is not necessarily responsible for the accuracy of data entered by their subscribers the fact remains that it is inappropriate and potentially damaging for a credit provider to list an incorrect or inappropriate credit listing. There is significant protection in place for consumers by way of the Consumer Credit Code and other related legislation which sadly many people including credit providers are not aware of and this lack of understanding often results in inappropriate credit listings being recorded.
From a mortgage brokers point of view the most effective way of helping their client restore their credit rating and in turn improve their credit score may be to determine the validity of the credit listing in question. Given the listing proves to be incorrect it can be successfully challenged and permanently removed from a credit report, the result being the instant adjustment of the individuals credit score.
I am aware that some credit providers do question the process of credit restoration as they fear it has the potential to undermine their credit process. While I acknowledge this concern, genuine credit repair is about helping people who are the victim of genuinely incorrect or faulty credit listings, listings that that should not have been recorded and therefore are not a true representation of a person’s credit worthiness. Credit providers do not have anything to fear from reputable credit repair companies while mortgage brokers and their clients may have much to gain.
John Dickinson is the director of Clean Credit, a member of the newly launched Credit Repair Institute of Australasia (CRIA).