New credit scoring system will catch out investors
In March 2014 your credit file will include more information. What can you do to make sure you can still qualify for a mortgage?
Blogger: Otto Dargan, director, homeloanexperts.com.au
A long time ago banks were reluctant to lend to people that they didn’t know. I mean, would you lend $500,000 to a stranger?
If you weren’t an existing customer of a bank they simply weren’t interested as they didn’t have the information they needed to make an accurate decision.
In modern times we all have a credit file which records the loans we have applied for and also if we have had any serious problems with repaying those debts.
Unlike in other countries, such as the USA, our credit files held by Veda Advantage don’t have any positive information. We only have negative information recorded such as being over 60 days late with a debt (known as a default), court judgements and bankruptcy history.
This is all about to change!
What does Veda Advantage now know about you?
The banks have already begun sending more information to Veda Advantage showing if you were on time with your repayments each and every month.
In the past if you were late every month, yet kept in contact with the bank and worked with them, then you may not have a default recorded on your file for a very long time. I have seen a client who was behind for over two years without a default ever being noted on his file!
In March 2014 Veda will begin including this repayment information in your credit file. Banks will not just see payment defaults, they will also see the repayment history for the last two years for all of your mortgages, personal loans, credit cards and some other types of credit.
This means that banks will know as much about you as they would for an existing customer.
How will investors be affected?
If you are well behaved and make every payment on time then this will be fantastic news! Your credit score will increase significantly. Your credit score is an automatic score given to your loan application when it is assessed by a bank, so your loan is more likely to be approved.
If you occasionally miss payments or are late then you will see a drop in your score. Banks will be able to see periods of hardship in the last two years or if you are a little slack with your payments.
They will also know exactly which debts you have. Some investors try to hide debts from their bank to increase their borrowing power. The banks are already very good at detecting this, however in the future they are going to know exactly which debts you have.
The good news is that some banks may no longer need statements for each of your debts when applying for a mortgage. If they can see your repayment history on your credit file then there is less of a need to see a statement. That’s great for anyone who has built a sizeable investment property portfolio.
What if you have defaults on your credit file already? If you have made all of your payments on time in the last two years then this may be great evidence that you had a problem in the past, yet you are now on your feet and you are a good borrower. It is possible that banks will be more likely to help you after this change.
Ultimately banks are going to rely more on credit scoring, and less on common sense and lending guidelines to assess loans.
What do you need to do to prepare?
To make sure that you are a winner from this change, take the following steps:
• Make every repayment on time, every time
• Set up direct debits for all of your debts and bill
• Keep money on standby so you don’t miss payments when life throws you a curveball
• Don’t apply for credit if you don’t need it (e.g. store cards / credit cards)
If you are concerned about your credit file you can ask your mortgage broker or you can obtain a copy from Veda Advantage. If you want to see how they have scored your file (known as VedaScore) then you will need to use their paid service.
