How do you rate?
What your credit file says about you
Your Credit File Report (CFR) is a document that banks and financiers refer to in determining whether you are a ‘good’ or ‘bad’ risk – financially speaking.
Each time you apply for finance, whether it is for an interest free store purchase, ZipPay, a credit card, mobile phone plan, personal or home loan, an entry is made on your CFR detailing the circumstances of your application. In addition, if you default on any loan or fail to pay your bills on time – such as utilities – then another entry is made on your report.
Think of your CFR as a report card for your finances: it’s basically a transcript of your personal financial history.
Your CFR is important to your home or investment purchasing journey!
A lot of people, including seasoned investors, think that property is about bricks and mortar, but that’s an illusion. Property buying is actually all about finance, because your ability- or lack thereof- to secure finance is what ultimately allows you to invest in real estate.
The truth is, without access to funding from banks and lenders, your property purchasing journey is dead in the water, so it’s vital that you understand finance. It really does hold the key to your success as you work to enter the property market or build your property portfolio. To truly understand how banks operate and how they make decisions about furnishing you with funds, you need to start at the very beginning: with your own CFR.
Your credit file report
As well as credit applications, information about how you mismanage your accounts is also included on your CFR. The failure to pay bills such as utilities, phone bills, loans, credit cards and mortgages is all logged. Do you consistently pay your bills on time, or are you more of an “I’ll wait for the second notice to roll around” kind of person? How promptly you pay your mobile phone bill might not seem like a big deal at the end of each month, but this could actually be the difference between you being approved or rejected for a home loan!
As a guide, note that your CFR can contain the following information:
Personal details such as name, residential address, date of birth and driver’s licence number.
Credit applications and enquiries, you have made during the past five years (the CFR records applications for credit, not actual approvals for credit).
Notation that a credit provider with whom you have a credit account is a “current credit provider”.
Overdue accounts (defaults) which may have been listed against your name.
Public record information such as:
Directorships and proprietorships
Judgments and court writs
All lenders, and in fact any company that provides you with a version of credit, will evaluate you in terms of risk. If they extend to you the opportunity to enter a payment contract, they need to view you according to the risk you pose to their business. This is as true of your bank as it is of your mobile phone provider or utilities company.
This is because they need to know whether there is any real risk that you will not make your monthly repayments – and will therefore cause them to endure a financial loss. To help them make this decision, they turn to your CFR.
Your credit rating can have long-lasting impacts on your ability to purchase or invest in property. Not only will it affect your borrowing capacity, but it can also force you into loans that charge hefty interest rates and higher fees and charges.
Did you know – Overdue Accounts show as a payment default !?
Overdue accounts are listed on your CFR as a payment default, and even when they’re fully repaid, they remain on your file for five years from the date of listing. A payment default is an account of $150 or more that is 60 days or more overdue. For example, if you have a telephone bill that is over $150, and it was due more than 60 days ago, it could be listed on your CFR as a payment default.
So exactly how is your CFR built?
Your credit file report is initiated the very first time that you apply for credit, whether you’re signing up for a mobile phone contract or applying for a car loan. It is gathered by credit reporting agencies and contains information that is available in the public domain and which is obtained from public authorities.
If you defaulted on any loans or failed to pay any bills – regardless of how big or how small the amount is – then an entry is made on your report.
Pre-Approvals and Your Credit File
If you’ve ever applied for a loan before, you’ll be familiar with what banks call pre-approval.
This is when you compile all of your information, lodge an application with your bank, and they enter your data into their system.
They then advise you that your loan has been pre-approved in principle, provided that all of your records and references check out, that the value of the house you’re buying stacks up, and that your financial situation doesn’t change between application and settlement (for instance, you don’t lose your job).
Pre-approval gives you the ability to set a realistic price range and provides you with the reassurance that you may need to confidently shop for property in the knowledge that your finance is essentially sorted.
Here’s an example…
Let’s say that you fill out your application and send it off to your bank for pre-approval. The bank processes the application and is pleased to offer you pre-approval for a loan of up to $550,000.
The only problem is, you’ve found the property you want and to buy it, you need to borrow $600,000. When speaking with your bank previously, they had advised that this figure seemed realistic, so you call them to find out why the pre-approved amount was lower.
Your bank advises that the problem is your level of personal debt: between you and your partner, you have five joint credit cards and personal loans with limits totalling $45,000.
The month before applying for a mortgage, you had tried to shape up your finances by transferring two credit cards onto one new credit card account, which offered a low balance transfer for six months. Before that, you had six personal debts totalling $52,000 – you had tried to get your accounts in order, but clearly it wasn’t enough! So, you re-evaluate.
Of your five remaining personal loans and credit cards, two are credit card accounts that you’d like to keep open for emergencies. On one of these cards you owe practically nothing, and on the other, the debt is around $500, so you reduce both of the limits to $1,000 each. Now, you still have five credit cards and personal loans, but the total debt limit has been reduced to $38,000. You re-submit your application to the bank and they revise their pre-approval up to $530,000. Close, but no cigar!
You’re still $20,000 shy of your desired loan amount. A friend recommends that you speak with their mortgage broker, as they helped them get their finance over the line a few months ago. You meet with the broker and they tell you that your bank is notoriously conservative with mortgage LVRs (loan to value ratios). Even though you have a deposit, your personal debt is making them uncomfortable. So, your new broker recommends that you apply with a different lender that has a more relaxed policy.
LET’S RECAP – In the last six weeks, your CFR has recorded the following – you have:
- Applied for a new credit card
- Obtained approval for a new credit card
- Transferred the debt from two existing credit cards to your new credit card account
- Closed two credit cards
- Obtained approval for a home loan of $550,000 with Bank A
- Reduced the limit on two credit cards
- Obtained pre-approval for a home loan of $530,000 with Bank A
And after all of this activity, you are about to apply for pre-approval a third time with a new lender, Bank B. You have a solid deposit – and now – a consolidated level of personal debts, but the high level of pinging on your CFR could make Bank B nervous.
If they offer you pre-approval for $550,000, you’re in business, but what if they turn your application down? You then have another credit enquiry entered onto your CFR and a credit rejection.
How do you think the next lender is going to favour your application?
According to Australia’s largest credit reporting agency credit providers each have their own lending criteria. Hence, they will each attach different degrees of importance to the information in your CFR and in your application, depending on the level of risk they wish to take when deciding whether or not to approve your credit.
For instance, to your initial bank, keeping your personal debts and credit cards to a minimum was important, but that may not be the case with your new lender. They might be more interested in stability and security – in which case – an erratic recent financial history may serve against you.
This is why we firmly believe that you must do your research and maximise your financial position before you even consider making a single loan application.
A qualified and experienced Finance Broker could be your biggest asset!
Even if you plan to apply with your own bank, we recommend that you engage a qualified and experienced Finance Broker. They could be your biggest asset!
They do all of the shopping around for you, and they find the best deals on the market for you and your situation – without needing to put your CFR at risk every time they find a new opportunity.
Once your application is perfectly polished, your broker will guide you towards the best lender for your situation. Rather than submitting applications and enquiries here, there and everywhere, you apply for pre-approval with one lender, one time only – so only one entry will appear on your CFR.
Even the slightest negative entry can impact your borrowing power for years to come.
You can obtain a copy of your CFR completely free of charge from the credit-reporting agency Veda Advantage Information Services and Solutions, which is the same company that banks and lenders turn to when they need to confirm the financial behaviours of loan applicants.
To request your CFR, visit www.mycreditfile.com.au or get in touch with our team at Custom Financial Solutions – where we do all the hard work for you!