The recording of payment histories is now well underway in Australia.
This means that credit files will contain a lot more information about a person’s credit behaviour, one of the more controversial being the ability for a credit provider to record late payments. In the past, a credit provider could record a payment default given an account was more than sixty days late, however now they are able to record a delinquent payment in as little as 14 days after the account falls due.
Repayment History Information (RHI) data can be held on a credit file for two years and can only be viewed by licensed credit providers, so not all organisations will be able to utilise this information.
The ten-thousand-dollar question is will affect people’s ability to secure finance?
To answer this, we must first look at a credit score. A credit score is simply a number that is displayed on the front page of a credit file. This score is behavioural-based, meaning that it will move up or down depending on the person’s credit activity. It is this score that credit providers look at when assessing an application. While a person’s credit score is relevant with most forms of finance, it is especially important for unsecured facilities, such as credit cards, as much of the decision-making is automated.
For example, a credit provider may say they will only look at people with a credit score of X or above and anything else will be declined. While this is a simplified view, it is true that many credit providers use a credit score as an initial sorting or culling method, whether they admit to it or not.
The lowest credit score a person can have, other than a bankruptcy, is -200 with the highest being 1,200. The higher the better of course, however in general, people would want to have a score of at least 600 if they hope to pass most credit providers’ lending guidelines.
Naturally, there are a number of factors a credit provider will consider when assessing an application, but a poor credit score will often trigger a decline right off the bat.
The algorithms the credit reporting agencies use to determine a credit score are a closely guarded secret; however it stands to reason that a late payment will have a negative effect on a credit score and one would assume the more late payments recorded the more effect it will have.
From a credit provider’s point of view, I can understand how this information could be useful as it means they have more data to assess a person’s credit worthiness, but I do feel that late payments could have the potential to cause more credit declines. And dare I say perhaps an opportunity for a credit provider to classify an application as “non-conforming” and increase their rate and/or fees.
It is fair to say that many people struggle with bills from time to time and there are a multitude of reasons why someone might be a little late paying an account. With this in mind, it’s conceivable that many people may find themselves with a poor credit rating due to some late payments.
There is no doubt that the credit market is tight and people are finding it increasingly difficult to secure finance. Credit providers are saying “no” more than they used to and I hope that a few late payments will not cause them to tighten the screws even more, which ultimately will mean more pain for the consumer and brokers.
Let’s hope I’m wrong!
John Dickinson is the director of DebtX Mediation Services, a debt mediation company focused on helping people regain financial control through the reduction and elimination of their debts. Learn more at debtx.com.au.