“How is it that a seemingly insignificant credit listing can stop my client from getting a loan?”
It can be difficult to accept that something as small as a paid default to a phone carrier listed years ago can still have the capacity to cause so much trouble for people trying to secure credit. After all, such a listing may not at all represent your client’s current financial position or reflect an appropriate risk profile.
To better understand this we need to look at how credit scoring actually works.
How Credit Scoring Works
Veda Advantage, Australia’s largest credit reporting agency, has made significant changes to how a credit report is presented and in turn how it is assessed by credit providers. One such change is known as’ Veda 101′. In its most basic form Veda 101 relates to an overall credit score that is affected by a person’s credit activity and behavior. Everything from credit enquiries, credit applications and even change of address can affect a person’s credit score.
The real purpose of the Veda Advantage 101 credit scoring system is to provide to a potential credit provider with a single highly visible means of assessing risk. Credit scores begin at -200 and finish at 1200. The lower the score, the higher the risk is considered to be.
According to Veda Advantage a credit score of 200 represents odds of 1:1 which means the applicant has a 50% chance of having an adverse event on their credit file within the next twelve months. For every additional 100 points the odds double, meaning the applicant has less chance of having an adverse event on their credit file.
This graph reflects how Veda Advantage relates a credit score to risk.
Let’s take a close look at this. Say your client has a credit score of 300; according to this scoring system they have a 33% chance of having an adverse credit event in the next 12 months. Even a credit score of 400 still reflects a 20% chance. Where do you think a credit score would need to be before a credit provider starts saying yes?
I’m sure many of you are thinking that a person would have to have a terrible credit history to have a credit score of around 300: think again.
Credit Score Example
This person had a credit score of 390 that was due primarily to a small, paid telecommunication default recorded two years ago. According to the Veda Advantage credit scoring system, this score indicated to a credit provider that this person had over a 20% chance of having an adverse credit event in the next 12 months. Do you think this person was having trouble getting approved? You bet.
To demonstrate what affect even a small credit issue can have on a credit score, let’s see what happened after the default was removed from the credit report.
There you have it, the credit score moved from 390 to 577. That’s 187 points difference. To a credit provider the risk of this person having an adverse credit event in the next 12 months has moved from over 20% to well under 10%. That’s all that was required to turn a decline into an approval.
The purpose of this exercise is not to demonstrate that in the right circumstances negative credit listings can be removed from a credit file, but to show you the effect that even one small credit event can have on a person’s credit score.
I’m sure that many credit providers themselves feel that the way credit scoring operates is a broad brush approach. As a result many people don’t qualify for finance when in reality they would prove to be reliable and credit worthy. The reality is credit providers subscribe to organisations such as Veda Advantage to help them determine risk and not applying these principles to their risk assessment processes would defeat the purpose from their perspective. Given this, credit scoring and the problems it can produce are a fact of life and are very much here to stay.
I hope this helps you to better understand how credit scoring operates and why what may appear to be an insignificant credit event can cause so much trouble for you and your clients. Clean Credit’s credit repair service can help people remove negative listings from their credit files, allowing them to gain a better credit score.
Clean Credit 1300 015 210