Credit Scores & Your Character - Why Both Matter.
“Lending is not based primarily on money or property. No sir, the first thing is character.” J.P. Morgan
Character is arguably the key component of the Five C's of Credit, and is best summarised as a borrower's willingness to meet their credit obligations. In other words, how trustworthy and reliable are they?
In the past, character was largely assessed on qualitative means, though with the advent of technology, it is a different game now.
You may have heard about credit scoring in the context of your finance application. A credit score is a statistical number that, based on credit history, indicates your creditworthiness.
Your credit score in Australia typically ranges from 0 to 1,000 or 1,200. The higher the score, the more financially trustworthy a person is from a lender’s perspective.
The score is driven by many obvious factors such as your previous credit conduct and your frequency of applications. Other demographic factors, such as age and where you live, are also included in the score. This science has been around for a while and is always being enhanced to include new technology, including AI.
Comprehensive Credit Reporting
Lenders now require more details of the credit you have (e.g. actual loan terms and repayments) to be included in your report as financiers deepen their credit decisions to match changing government policy. While credit scoring is not new, it is now based on deeper demographic data, which allows a credit provider to look at high-volume historical behavioural data, such as 3-6 months of bank statements, to produce a more sophisticated real-time credit assessment.
Accessing Your Score & Security
If you are actively seeking credit such as commercial finance or mortgage finance it is vital that you understand your credit rating and the factors that impact your score.
A prudent caution in light of ongoing cybersecurity breaches is to check your credit report on a routine basis to ensure there have been no unauthorised enquiries or worst-case use of your identity.
You can access a free credit report from reputable services such as Equifax or Experian. Other paid subscription services include credit file access alerts, applying for corrections, or the ability to lock your credit file after a potential security breach. Prices vary for individuals and business accounts.
Behavioural Assessments & Credit Segregation
This assessment is a blunter means of credit decisioning, based on meeting exacting criteria. It allows financiers to target a direct segment of a market and is popular with certain business finance products, such as Equipment Finance. Say you purchase a new vehicle for business use, and you meet the following criteria:
✓ Have been in business for 2 years and have a registered ABN
✓ Have a clear credit history
✓ You own a residential property
✓ Your ATO Tax Portal is current and clear
If you check these boxes, you will generally get an immediate approval without the need to supply verifying income documentation. In addition, the rate on this finance facility may be cheaper than if you do not meet the criteria and need to supply all other documentation.
Credit Score Assistance
Since credit scores are a fluid assessment taken at a point in time, the good news is that they can easily be improved. If a score happens to be adversely affected by fraud or past credit arrears or even by life events such as divorce or redundancy, our Finance Partners are here to assist.
Contact MCP
1300 510 816 or your Finance Partner
enquiry@mcpfinancial.com.au