Consumer Credit Report & Risk Scoring

Credit Scoring is a complicated and weighted measure of a credit report profile which lenders use to assess credit-worthiness based upon modelled statistical analysis.  In other words, how others with the same credit characteristics tend to repay their bills and the likelihood of the creditor getting repaid.

With the tightening of lending over the past few years, lenders have increased their reliance on the use of credit scoring as a factor in their loan assessments.  Incredibly, some lenders will immediately decline a loan application if the Credit Scoring Model they use categorizes an application as being “too risky” and the lender will make no attempt to review the ability to service a loan based upon traditional methods of income, expense and repayment patterns.   Unfortunately, it is the individual Bank which sets their own standard for using credit scoring.

Some factors contributing to a higher credit risk scoring profile from a Credit Report are:

• Poor repayment, credit default or judgment history
• Multiple credit enquiries
• High credit limits
• Multiple residential address changes in a short period of time
• Multiple employers over a short period of time

The thought process behind these factors:

Poor Repayment History – Statistically, once someone has overdue, defaulted accounts or judgements on their credit report, they are more likely to have future credit problems.   This is a clear sign to a lender that the consumer may already be over-extended on credit. Most lenders do realise that some incidents are very minor, such as a small utility bill from years back and may have the ability to manually review this matter.   However, your credit score would still go into a ‘Higher Risk’ category.

Recent Credit Enquiries – If an applicant has many recent enquiries with other creditors and is applying for new credit, statistically there is a very good chance the other creditors have declined the loan request or the application has been withdrawn after the creditor requested specific unattainable documentation.   The thought is that the borrower will adjust the application to the next creditor to avoid the “same mistake.”   The new creditor is then worried they have not been provided with an accurate portrayal of facts to base a proper credit assessment.

High Credit Limits – Increase the likelihood that one is over-extended and relies too much on credit to satisfy cash-flow needs which may ultimately result in not being able to repay a mortgage.

High number of residential address or employment changes in a short period of time – This represents a stability factor.  The less stable one’s home and work environment the less stable their income is which results in a greater propensity for late payments and credit defaults.

Every Credit Report should contain the following information:

• All credit applications made within the past 5 years
• Credit information from current and past creditors – the exact amount of creditor detail is not consistent, such as credit limits
• Derogatory credit including overdue accounts and defaults
• Public record information such as court judgements, writs, bankruptcy information and directorship details
• Residential address information
• Employment information

I have also been advised by various lenders that the following are considered to be a higher risk to lenders these days:

• Self-Employed Borrowers
• Older Borrowers
• Investors
• Cash-out refinances – to pay off credit cards
• Lo-documentation loans
• Non-Metropolitan Area properties
• Multiple top-ups

Here’s what you can do to improve your credit score…

I suggest you begin by ordering a copy of your Veda Credit Report. If you are in no hurry, you can get one for free in about two weeks, otherwise you can get one almost immediately by paying $36.95. Go to the website below for more details on ordering your report:

http://www.vedaadvantage.com/personal/mcf/my-credit-file.dot

At Empower Wealth, we have over 30 lenders we can select from in finding a finance solution for your needs.  Our experience and knowledge of each lenders credit scoring platform gives us an edge in knowing where to place your business to ensure you don’t get your loan declined and have this decline appear on your credit file.  Why not let us do the research and sourcing for you, so you get the property and loan that you want.  Best of all our services are at no cost to you as we are paid by the lender – A win/win outcome.

In next month’s newsletter I will share with you tips on how to clean up your credit report and improve your score.