Terrors may hide in shadows

Everyone should check their credit records regularly, writes Christine Long.

In April, New South Wales Central Coast resident Ash Mackinnon took out a mortgage and bought a house. That may not sound remarkable, but wait until you hear his backstory. Seven years ago he had stacked up about $80,000 of credit-card debt to buy cancer treatment for his wife.

As someone who had been a full-time TAFE teacher for 15 years and had his own business, he had never worried about getting credit.

When his wife died, he tried to roll the high-interest credit-card debt into his mortgage. But lenders weren't keen on his sole-parent status.

By the time he got a refinancing deal months later, his credit card debt had grown. The new mortgage would no longer pay off the card debt and the deal fell through.

For a couple of years he survived by rolling his debts from one zero balance transfer offer to another. It helped keep his head above water - just - but it was doing significant damage to his credit file.

"I didn't realise that each time you make an application - even if it's accepted or rejected - it goes on to your credit file," Mackinnon says.

In fact, he didn't know he had a credit file. "It was not naive," he says. "I just never had the need to know. I'd always been in a financial situation that was quite strong and positive."

The impact of his strategy really came to light when a mortgage broker helped him refinance. His only option was a private lender that charged a $34,000 application fee for a six-month loan.

When another attempt to refinance six months later didn't work, he sold up.

"It was just too difficult," Mackinnon says.

It then became a waiting game of letting some of his initial applications drop off his credit file (which takes five years).

Finally this year, he and his new partner were able to secure a BankWest mortgage and a home of their own.

Mackinnon describes his story as an "extreme" example, but he's not alone when it comes to being mystified by the credit reporting process. According to research by credit bureau Veda, more than 2.3 million, or 15 per cent, of credit-active Australians are at risk of a default being recorded on their credit report in the next 12 months, with Gen Y borrowers most at risk.

Yet Veda reports there is a lack of awareness about how a poor credit report can affect chances of getting credit.

Its research shows 80 per cent of Australians had never accessed their credit report. Almost half think their report records overdue library fines and video store bills, and more than a quarter add overdue speeding fines to the list.

Often, a rejected application is the rude awakening that pushes people to learn more about their credit file.

"Almost a third of consumers don't realise that all credit applications are recorded as part of their credit history - even if they are not successful or don't accept the loan offers," says Belinda Diprose, a marketing manager at Veda.

Multiple applications can sometimes be read as a sign of financial stress and lead to a decline. Even if you think you have nothing to worry about, it pays to check your credit file annually and definitely before applying for credit.

Graham Doessel, the chief executive officer of Credit Rating Repair, says about 63 per cent of its clients have defaults, writs or judgments that are listed in error on their credit file.

"We have clients who are facing identity theft; some are caught in issues over separation from their spouse; some have been disputing a bill that went to default stage; and many people are just victims of the fallout from inadequate billing procedures - wrong names, wrong addresses, human and computer errors."

There is another reason why it makes sense to get into the habit of checking your credit file regularly. From March 2014, Australia will adopt a "comprehensive" credit reporting system that will add even more information to your credit file.

More data increases the chances of it being inaccurate, says Kat Lane, principal solicitor with Consumer Credit Legal Centre, in NSW.

So what should you expect to see? Three areas: consumer credit information; commercial credit information and public record information such as court judgments; directorships or proprietorships; and bankruptcy or debt agreements.

The consumer credit information shows applications for credit within the past five years. These include mortgages, credit cards, personal and car loans, and in-store finance such as 24-month furniture deals.

Under the current "negative" reporting system, it doesn't show whether the application was successful, used, or whether the account has been closed. That will change in March. Then, your file will list when each account was opened and closed, and the current limit for each open account.

Defaults are also listed, and these can jeopardise your ability to access credit. A default may be listed when a payment is 60 days overdue, and they can include telco and utility bills.

Lane says defaults can only be removed if they are proved wrong or if the consumer wasn't properly notified or told it was going to be listed. Even if paid later, defaults stay on your file for five years.

These can occur when life just slides by. You move out of a shared house and go overseas for six months and your name is left on a bill that doesn't get paid and you can't be contacted.

Joe Sirianni, the executive director of mortgage advisory company Smartline, points to a recent client who discovered a telco default on his file. He paid it and it didn't affect his ability to borrow.

"If there's a whole host of different defaults, it's a different issue," he says.

Some overdue accounts can be listed for seven years. But the biggest change coming with comprehensive credit reporting is that your credit file will carry 24 months of repayment history information. Each month, your file will show if a payment was made on time or missed. Partial payments will be considered missed. It will also show when you paid any missed payments.

Although the Credit Reporting Code of Conduct is yet to be finalised, it is likely there will only be a five-day grace period before a repayment will be listed as missed. Repayment history information will only be gathered for mortgages, credit cards and loans, not telcos and utilities.

Diprose says it could make getting credit easier for some people - such as new migrants - who might have a "thin file" under the negative reporting system. It could also indicate that a late payment is a short-term issue.

Prompt payers may benefit if credit providers bring in risk-based pricing of financial products.

More information allows banks to be "far more creative in their segmentation of products", Sirianni says. "People who have good credit ratings will find that they will get looked after with quick approvals, perhaps better discounts, better propositions."

Those people also have more negotiating power, according to Veda chief executive Nerida Caesar. "Today's world doesn't give you the power to go in and negotiate that you are a good credit risk and therefore you should be given a lower rate."

A good risk under the current system may find they are perceived differently if they are slack about making repayments. "If you are one of these people who has not been particularly diligent about paying your bills on time suddenly that information will be able to be used," says Dun & Bradstreet chief executive Gareth Jones.

Credit providers were able to collect repayment history information from December 2012. But before it appears on a credit file from March, your credit provider has to notify you. This could simply be a notice of a change in terms and conditions. Lane says it's not clear whether providers are yet collecting that information.

Jones says experience in other countries indicates that even after comprehensive reporting is introduced it often takes some time for the sharing of repayment history data to become widespread.



Accessing your credit file

Veda (veda.com.au) and Dun & Bradstreet (checkyourcredit.com.au) are Australia's two main credit bureaus.

Both provide a free copy of your credit report within 10 working days.

Checkyourcredit.com.au can provide a copy within one business day for $30 or its alert service ($60 per year) provides a report and notifies you when information changes.

Veda has just introduced VedaScore. It uses information on a person's credit file to express their creditworthiness as a number between 0 and 1200. The higher the number, the better the individual's creditworthiness.

It charges $69.95 a year for one copy of your credit report and a yearly update of your VedaScore, or $84.95 for two copies a year; monthly VedaScore updates and credit alerts.



10 ways to spruce up your credit file

Check your file annually, particularly before applying for credit.

Be wary of making too many applications for credit.

Double-check terms and conditions to see when information is given to credit bureaus, particularly if making applications online or using a mortgage broker.

Remove your name from shared house bills. Likewise, joint credit accounts in the event of a separation or divorce. Notify lenders of a change in address.

Protect personal information to prevent identity theft.

Set up automatic payments to make repayments on time.

If you can't make a repayment on time, contact your lender to make a hardship arrangement. The same applies for telco and utilities bills.

Pay defaults.

Contact your credit provider if you find an error - say if a debt is listed twice or the amount wrong.

Seek advice if a default has been incorrectly listed - say the bill is in dispute or a payment regime in place. Lane advises using free services by financial counsellors or legal advice centres and dispute resolution services, rather than paying for credit repair services.



'I didn't realise that each time you make an application - even if it's accepted or rejected - it

goes on to your credit file.'- Ash Mackinnon

Joe Sirianni, the executive director of mortgage advisory company Smartline, points to a recent client who discovered a telco default on his file. He paid it and it didn't affect his ability to borrow.