Improve credit rating by making fewer applications
Australians should limit their applications for credit cards and personal loans in an effort to boost their debt rating, the nation’s largest credit bureau says.
Analysis of Veda Advantage’s database of more than 14.5 million Australians revealed consumers who made many applications for credit were at a greater risk of defaulting in the following year.
Many applications for credit cards over a period of six months lifted their risk of default by 5.2 times in the following 12 months, Veda research showed.
Veda Advantage general manager Russell Evans said Australians need to be aware that enquiring too much for credit harmed their applications.
“If a bank looks at someone’s credit file through a credit scorecard, and sees they have made a number of applications with a number of lenders in a short period of time, there will be a red flag coming out,” Mr Evans said.
“The probability of that person defaulting is a lot higher than someone who has made one or two credit enquiries over a six to 12 month period.”
Individuals who apply for multiple personal loans within six months were 4.2 times more likely to default on their new finance in the next 12 months, the research showed.
And Australians with many applications for personal credit (including credit card and personal loans) in a six-month period increased their risk of default by 6.1 times in the next year.
A bank had two criteria when processing an application for a credit card, Mr Evans said.
“They need to be able to validate first a person’s capacity to pay and their willingness to pay,” he said.
Consumers were more likely to apply for more credit when they became financially stressed, Mr Evans said.
“They will shop around quite a lot until they find someone who will give them more credit,” he said.
“They think the way they can get out of their debt cycle is to borrow more.”
Mr Evans said consumers had simple steps to cut their debt and improve their chances of gaining credit.
“What we absolutely recommend is people research,” he said.
“There are always good deals out there, so once you have made that decision then apply for credit.”
Consumers should identify any problems in repaying bills and loans and seek help.
“What we also advocate is people break the debt cycle,” Mr Evans said.
“If they are getting into financial stress and it is getting difficult for them to make repayments, don’t apply for more debt to get themselves out of it.”
All banks and lenders have financial services that offer advice, Mr Evans said.
“The last thing a bank wants to do is default someone,” he said.
Those with credit troubles need to learn to spend less, Mr Evans said.
“Small measures and lifestyle changes such as catching public transport are not only good for the environment, but good for your finances, too.
AAP
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Savvy Investor July 13, 2009
This is the worst problem of all for Brokers and our clients. Many of the Lenders look at the number of Credit checks made and not the reason for them. This is the worst decision making tool as it penalises the person shopping around who may not even realise that a credit check has been done on them every time they have made an enquiry. They have a right to shop around and are entitled to get the best deal. I know this is a little off topic as this article relates to Credit Cards but the same process is used to deny loan applications!
The Law must be changed to ensure that any time a Credit entry is made to your file you are sent a copy of it and of the institution that made it - and most importantly their reason for doing so. Under privacy legislation other companies see only the number of hits not the reasons for them so are free to assume the worst. If you were informed and could present the reasons for each entry (file them with your other tax records each year), then Lenders would stop assuming the worst and rate people based on their merits not their hit rate on their credit files! This is one case where the Law sought to protect the person but instead inflicted more pain on them and should be redresses immediately. The ‘extra’ cost of informing you should be born by the company making the change to the file as it is them who are instigating the change. The contact details are on file already so should be a no brainer.