Simply put credit is the ability to borrow money or obtain goods and/or services, with the agreement 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 aren’t commonly considered credit:
- Mobile phone contracts.
- Internet contracts
- Buy Now Pay Later purchases (BNPL)
- Interest free purchases from your local furniture store
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, such as:
- Your name.
- Date of birth.
- Your current employer.
It may also contain information about any instances in which you have failed to meet your repayment obligations, such as defaults or other public documents such as court documents/decisions and instances of bankruptcy.
For a list of inclusions please visit the Money Smart website.
A consumer can access their credit report forfree, once every 3 months. It is possible to access a credit report more frequentlybt keep in mind requesting and accessing a credit report may impact you creditscore.
Accessing your credit report is easy, either by contacting a credit reporting bureau directly or using a service such as Credit Simple, Finder or Canstar.
TIP: It’s good to get in the habit of getting a free report before applying for the credit product. That way you know your credit worthiness prior to completing your application.
Each reporting bureau will have different information about a consumer, in addition they have different scoring models and scoring ranges. To avoid any confusion, a consumers credit score will be ranked with a band, for example: low, average, good, very good, excellent.
The band classification as well as the numerical credit score indicates a consumers credit worthiness and ability to repay a loan or credit product. Typically, the higher the credit score and classification, the more credit worthy a consumer is regarded as. Meaning a higher score increases the likelihood of being approved for a loan.
A credit score summarises what your credit report states about your ability to manage existing and past credit, in a single number.
Generally, the higher your credit score, the more likely you are to get approved for a loan at a better interest rate.
Many lenders use credit scores to help them determine your credit worthiness. Credit worthiness, is your likelihood to repay a loan.
A credit score provided by a credit reporting agency is based on both your credit history and other credit related information, in addition to general demographic information that agency has on you.
Information such as your:
· Current and past addresses
· Type of credit applied for
· Type of credit provider used in the past
· Any and all overdue debts
· The number of previous enquiries and applications made for credit
· The amount applied for on each application
· Public records and documents
There is no common framework to calculate a credit score. Each credit reporting bureau and lender may employ a different modelling method to calculate your overall credit worthiness. Depending on their tolerance to risk, consumers may find some lenders are more flexible with loan applications
Each credit reporting bureau will have access to different sets of repayment data on a consumer. Having unique sets of data and different calculation models results in different credit scores.
Data available may be quite limited, this leads to models 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 your score drops.
As odd as this is, it's the result of a particular variable that is used to determine your credit score. Basically this variable dictates that the more credit applications a consumer makes, the higher the likelihood they will default on a credit product. This is a variable that was set decades ago, now days consumer like to shop around for the best product and for a vast majority of consumers, having multiple applications is not an indicator of a higher rate of default.
Fortunately, the credit score is only one element of the information used by the credit provider to make a decision. Typically, a credit decision will be made on the basis of a credit score plus bank statement information.
A credit reporting agency is a financial institution that allows different types of lenders to share information about the credit behaviours of consumers and businesses.
Credit reporting agencies, also referred to as credit reporting bureaus, will take the information supplied to them and using other variables and calculation methodologies, will create a credit report with a credit score, to indicate the credit worthiness of a consumer or business.
Credit reporting agencies may also receive information from external sources, such as telecommunication providers, utility providers and household goods retailers. All this information impacts a consumer’s or businesses credit score. Financial institution will work with credit reporting agencies to receive comprehensive reports on applicants prior to approving any credit product.
Fair credit reporting is all about open communication.
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