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The Fundamentals

June 17, 2022

To understand the fundamentals of credit reporting, first you need to understand what credit is and its different forms in relation to credit reporting. This will give you a break down of the common terms and provide an understanding of credit reporting.

What is credit?

(in terms of credit reporting)

In simple terms, credit is the ability to borrow money or obtain goods and/or services, with the promise that you will pay them back at a later date.  

Credit comes in many forms; most consumers are experienced with buying on credit. A prime example of this is a credit card. Consumers that own a credit card or have owned one in the past, understand that it allows them to make purchases or pay for items now with the intention of paying back later. Other forms of credit include mortgages, car and personal loans.

Often people assume credit applies to cash, purchasing an item on a credit or getting loan for a car or holiday for example, but credit comes in other forms. Here are a few examples that are sometimes forgotten:

  • Buy Now Pay Later purchases (BNPL)
  • Mobile Phone contracts.
  • Internet contracts
  • Utilities
  • Interest free purchases from your local furniture store

What is a credit reporting agency?

Credit Reporting Agencies allow lenders to share information about the credit behaviours of consumers and businesses. Traditionally the purpose has been to avoid poor borrowers from simply moving between different credit providers and building up large sums of unpaid credit (which ultimately everyone pays for through higher interest rates).

More recently credit reporting agencies have incorporated positive repayment information into their dataset. The goal being that positive information will help lift consumer credit scores generally.

What is a credit report?

A credit report contains information about how you manage any current and past debts, as well as your repayment history.

Credit reports not only contain information about your credit history but also have all the necessary information to identify you. It may also contain information about any instances in which you have failed to meet your repayment obligations and other public documents such as court documents/decisions and instances of bankruptcy.

Information that can appear on your credit report includes:

Identification information including:

  • Name.
  • Date of birth.
  • Current and past addresses.
  • Place of work.

Credit applications (sometimes called enquiries) including:

  • Type of credit applied for.
  • The amount.
  • The provider.

Credit liabilities – current and past including:

  • The type of credit.
  • The amount.
  • The provider.

Monthly repayments information for each liability including:

  • How up to date (or otherwise) the account is relative to obligations.

Any defaulted debts, including:

  • Whether it’s still current.
  • The amount of bad debt.
  • The provider responsible for the debt.

Unfortunately, only some credit providers include repayment information in the credit report, which also impacts the information that they see about you when reviewing an application.

Further, a credit report only lists the information that has been shared with the agency that prepared the report, which explains why often details are missing and can also explain why different credit providers will respond differently to the same application.

What is a credit score?

A credit score is a numerical summary of your credit report. Many lenders use this score to help them determine your creditworthiness.

To calculate a credit score, the credit reporting agencies look at all the data provided to them (plus some publicly available information) to generate models that define risk. Because the data available is quite restricted this leads to outcomes that are sometimes counter intuitive. For example, if you monitor your score when applying for a new credit product (regardless of whether you take up the loan), you will notice that often your score falls. This is because the model tells them that the more credit applications a consumer makes the more likely they are to default – even though for most people this is not the case.

Fortunately, the credit score is only one element of information used by the credit provider to decide. Typically, a credit decision will be made based on a credit score plus bank statement information.

Why should I care?

Your credit score is sometimes the best tool that a credit provider has to assess risk when reviewing a credit application. Unfortunately, as with any system, at times errors are made, so it is important if you want to use credit to support your financial and personal goals that you check that the data that informs your credit worthiness is correct.

If you find that the information on your file is incorrect, or incomplete, you should first contact your credit provider to correct the information. If for some reason they are unable to correct your information, you can then direct your enquiries to the credit reporting agency who will conduct a review.

Finally, if your information is still incorrect, you can engage with AFCA, which is the external dispute resolution agency responsible for financial services complaints in Australia.