Warning this ‘Great Lockdown’ will be a “crisis like no other”, IMF chief economist Gita Gopinath stated, “It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago.” (1)
While the true scale of this economic crisis is yet to be experienced, many Australians are already feeling its effects. Both unemployment and underemployment have hit hard. So far, 275,000 businesses have enrolled for the JobKeeper program, while 600,000 individuals have applied for JobSeeker. According to Scott Morrison, more people have registered as unemployed over the past few weeks than Services Australia usually reports over a whole year.
Feeling The Pinch
Households across Australia are feeling the pinch. For some, a little cutting back here and there will get them through, but for others, the situation is much more serious. With little to no money coming in, it may be a struggle for them to put food on the table, never mind cover the big stuff, such as the mortgage or mounting credit card bills.
Which could lead to even more trouble. While making sure there’s enough to eat will always be the number one priority, failing to make credit repayments on time – whether that’s mortgage repayments, car loan repayments, credit card repayments, or repayments of any other type of credit – will cause problems in the both the short term and the long term.
In the short term, not paying repayments when they’re due will likely result in late fees. Not great, at $25 or $35 a pop, as this adds to the overall amount that will need to be repaid. However, letting repayments remain unpaid over time can be much more detrimental. Not only will interest and fees continue to stack up on that balance, if the repayment remains outstanding, the lender is bound by law to report it to the credit reporting agencies as a missed payment.
So what, you say. A black mark on your credit report is no big deal. Unfortunately, it is a big deal. Especially when you want to apply for credit in the future. Want to buy a house? Your lender will check your credit. Want to rent somewhere? Your landlord will check your credit. Want a new phone contract? Your telco will check your credit. Want to apply for a credit card, a car loan, a personal loan? You got it, your provider will check your credit.
Your Credit, Your Problem
Your credit counts for a lot. And, while we may like to think providers would cut us some slack in the future – especially given the scale of the situation we are facing today – it’s unlikely, to say the least. If your credit report takes a knock now, the black marks you receive will remain on file for years to come.
Let’s say you decide to apply for credit in a few years. A credit card or a car loan, perhaps. Your financial situation is pretty good, and you know you can afford it. But, even if that’s the case, your provider will check your credit to see how well you have dealt with credit in the past. Those payments you missed during the Great Lockdown? They will have lowered your credit score, and could mean you pay more in interest as a result, or worse, your application could be declined.
What’s the solution? The simple answer is, of course, always pay your repayments on time. But, as we all know, life is not simple – especially now. So instead, we’re going to take a closer look at credit reporting and what missing a repayment can do to your credit score, to then find the best ways to avoid missing repayments when times get tough. Last of all, we’ll check in on how you can improve your credit, so you can enjoy all the benefits having a good credit score can provide.
A Basic Guide To Credit Reporting
Wondering what goes on your credit report? Not entirely sure how your credit score is calculated? If the intricacies of credit reporting are lost on you, never fear, we’re here to break down the important bits. Why does your credit report matter? Let’s find out.
Q. What is a credit report?
|A. Your credit report – also called a credit file – contains detailed information of your history as a borrower. This information includes loans and other types of credit you currently hold and have held in the past, and whether you have made repayments on time.|
Q. What is a credit score?
|A. Your credit score is a numerical representation of your trustworthiness as a borrower. Using the information provided within your credit report, it reflects how consistent you are at paying your repayments on time and not borrowing beyond your limits.|
Q. What does a credit score do?
|A. Overall, your credit report and credit score are designed to show potential credit providers how ‘creditworthy’ you are. When you apply for credit, your provider will assess how you have dealt with credit in the past, and use that information to determine how you will likely deal with it in the future.|
Q. What is a good credit score?
| A. Your credit score will sit somewhere on a scale of zero to 1,000 or zero to 1,200, depending on the credit reporting agency in question. In Australia, there are three main credit reporting agencies: Equifax, Experian and Illion.|
As you can see, each agency uses different ranges to categorise users’ scores. So, where a score of 500 would be considered Below Average with Equifax, that same score would be considered Good with Illion.
In general though, the higher the credit score the better. If you have good credit, potential borrowers will see you as low risk, and would be more likely to approve your application. You may also pay less in interest if your lender determines interest rates according to credit rating.
Q. What is a bad credit score?
| A. With a bad credit score, you are deemed higher risk. Why? Your low credit score indicates that you either don’t have much experience dealing with credit, or you have dealt with credit poorly in the past. This suggests to potential providers that you may not deal well with credit in the future.|
For that reason, your bad credit could mean you pay higher interest, or worse, your application could be declined. In other situations, such as submitting an application for a rental property, the landlord may see your bad credit as an indication that you may not pay your rent on time, denying your application in favour of someone with better credit who is lower risk.
Q. What factors affect your credit score?
| A. Just as each credit reporting agency’s scoring system is different, so are the factors each takes into consideration when determining those scores. However, some of the most common factors that can affect your credit score are:|
Each factor is weighted differently, with positive factors increasing a user’s credit score, and negative factors decreasing it.
Q. How do you check your credit?
| A. Each of Australia’s three main credit reporting agencies offer free credit checks.|
To apply via Experian, you will need to provide a minimum of 100 points of identification and proof of address, and then complete a credit report request form. You can then order by email (Experian’s postal option is currently down due to coronavirus related disruptions), to receive a copy of your credit file within ten working days.
To apply via Equifax, you can apply for your free credit report once every 12 months, or within 90 days of a declined credit application. Outside of these conditions, Equifax offers paid access to your credit reports, with a one-off application costing $6.95 (this is also currently free), or a range of subscription services.
To apply via Illion, you can apply online or by post for your free credit report. You will need to provide proof of your identity and address.
By searching online, you will see a variety of third party websites offering ‘credit checks’. Most of these are free, but some offer premium subscription services as well. If you opt to check your credit via one of these third party providers, be sure to read the terms and conditions carefully to find out what they may do with your data. It’s also worth taking into account which credit reporting agency the third party provider accesses your information from.
Missing A Repayment
So, now we understand more about credit reporting and how it works, let’s get back to the issue at hand. You’re struggling financially and miss your credit card repayment. What happens now?
As we already know, negative factors such as defaults and credit infringements decrease your credit score. But surely one missed credit card repayment couldn’t have that much effect, surely?
Yep, it can. According to Experian, just one missed credit card repayment could see your credit score dropping 22%, even if you’ve never missed any credit card repayments before. That drop increases to 26% if you miss two repayments, and as much as 42% if you miss three or more repayments within a period of three months (2).
Making Changes To Avoid Missing Repayments
Given the widespread effect this coronavirus pandemic is having on our economy, there are few who remain safe from financial stress. There are, however, some groups who are more at risk of getting into trouble financially, who may find it more of a struggle to keep up with credit card and other loan repayments.
These at-risk groups may include those who are self-employed or who have a low income, those who have lost their job or who have been stood down, or those who have no savings. Those who got sick with the virus and were unable to work because of it may also find themselves in financial strife, as could those who don’t know how to access assistance, either from their provider or the government.
While the extent to which you may need to access help will depend on your situation, there are some things you could do to help you avoid missing your repayments.
Set Payment Reminders
While this may sound obvious, setting payment reminders for each of your credit card or loan repayment due dates is a good starting point if you want to avoid missing any of them. According to an Experian study last year, 48% of survey participants who missed a credit card repayment simply forgot the due date (3).
It goes without saying that knowing the date of your repayment won’t help you if you don’t have the money to cover it, but it can help you assess your financial situation as a whole, putting you in a better situation to deal with it correctly.
Assess Your Finances
Take time to assess your financial situation, looking at where you have money coming in, and where money is going out. Take note of all repayments and bills due, and try to see where you could possibly cut back.
Increase Your Income
If your income is lower than it once was, find out how you could increase it. You may be able to find a casual job within sectors that have seen an increase in demand, or you could see what benefits or income assistance you’re eligible for either on a state or federal level.
Through your MyGov account, you may be able to access assistance via the JobSeeker or JobKeeper programs, or you could choose to release some of your super (if you plan on doing this, seeking the advice of a financial advisor could be beneficial).
Designed to help users find any benefits or unclaimed government rebates they’re entitled to, CommBank’s Benefit Finder feature could also be worth checking out. CommBank says the number of Aussies accessing the feature almost doubled in March, with 78,000 claims in the four weeks to April 5 far surpassing the normal amount of 39,000 claims each month (4).
According CommBank, the top claims users have been seeking to access in the past month are:
- Unclaimed Money (34,000)
- Unclaimed Super (7,000)
- Power Saver Bonus (6,300)
- Coronavirus and Job Seeker Payments (5,900)
- Family Tax Benefit (2,800)
- Rent Assistance (2,700)
The bank says it also recently added an additional 15 government rebates to its Benefit Finder feature, including the VIC Utility Relief Grant Scheme, Federal Crisis payments, WA Hardship Utility Grant Scheme, SA Emergency Electricity Scheme, ACT Rates deferment, NSW RentStart Bond Loan, and ACT Funeral Costs.
Talk To Your Provider
If after assessing your finances you realise you are struggling, one of the first things to do is discuss your situation with your providers. Depending on the seriousness of your situation, that could mean talking to your bank, your lenders (home loan, car loan, personal loan), your credit card providers, your insurance providers, your telco and your utilities providers.
Many providers are offering relief packages and support to their customers, and are continuing to expand their financial hardship criteria. In terms of home loans, lenders are offering repayment ‘holidays’ for up to six months, as well as extremely low rates on fixed rate loan options. Some providers are also offering repayment holidays on personal loans and credit cards, while health insurers are suspending price increases and offering relief from paying premiums.
And, while each provider is dealing with the situation somewhat differently, all of them are encouraging customers to come forward if they feel they are struggling, before they find themselves in trouble. For anyone wanting to protect their credit score, this is an essential step.
Switch To A Cheaper Product
If your credit is in good shape – and your income remains steady – you may want to consider switching to a cheaper option, either by refinancing your loans or switching to a low cost credit card.
Say you choose to refinance your $400,000 home loan, switching from a 4.5% p.a. big bank offering to a 2.5% p.a. fixed term option, you could see your monthly repayment reduce by more than $400. It is worth pointing out that there may be fees associated with switching your home loan, and your credit will need to be good to be approved.
As for credit cards, you could opt for a card with a low rate of around 10%, which could save you heaps if you are currently carrying a balance on a card with a much higher rate. A balance transfer offer could also be an option if you have credit card debt you want to pay down, but you will have to be disciplined to ensure you pay it off within the introductory period.
Opting For A Repayment Holiday
Want to know more about those repayment holidays? As the name suggests, a repayment holiday allows borrowers to take a ‘holiday’ from their repayments. So, if they don’t have enough to cover their usual loan repayment or their minimum credit card repayment, they can take a break from paying them over the repayment holiday period.
This feature can be a good option for cash-strapped borrowers who simply don’t have enough coming in to cover their repayments, as it takes the pressure off month to month. And, as it prevents borrowers from potentially missing repayments, their credit score should remain unaffected.
According to the Australian Banking Association CEO Anna Bligh, records will not be kept for borrowers who are given approval to pause their loan repayments due to COVID-19. “Banks will report customers as not having missed a repayment, provided they were all up to date when granted relief,” Ms Bligh said in a statement (5).
And borrowers who were behind in repayments before they were granted a deferral? The ABA states that it would be up to lenders to determine how to report those missed repayments once the deferral period has ended, but in the meantime, they would not file a report.
“There may be other factors which can affect a customer’s credit rating, but customers accepting a COVID-19 loan repayment deferral can rest easy that the deferral will not be one of them,” Ms Bligh said.
Consider The Consequences
However, before opting for a repayment holiday, there are important factors to consider, such as how your provider will deal with interest. Many home loan lenders in particular are applying ‘interest capitalisation’ to paused loans. That means unpaid interest during the deferral period is added on to the principal of the loan, which would mean you pay interest on the unpaid interest as well.
As a result of this, the balance of your loan would typically end up higher after the deferral period. So, you may have higher repayments, a longer loan term, or your loan could end up costing you significantly more overall.
And credit card providers? On Thursday, Westpac was the first major bank to introduce a pause on interest payments for credit card users. As part of its support package, Westpac is now allowing credit card customers struggling financially as a result of coronavirus to pause their payments for three months, during which period no interest will accrue on their current balance or any new transactions.
After the three months, minimum payments and interest incurred will resume. And while cardholders will still be able to use their cards during the holiday (as long as they haven’t reached their credit limit), it’s not yet known if interest will be capitalised.
How To Improve Your Credit Score
Whether your credit has taken a hit or not, there are ways you can work on improving your credit score as you improve your financial situation.
Since Comprehensive Credit Reporting was introduced in 2018, potential providers are able to see your positive financial behaviours as well as negative ones. That means, if you continue to pay repayments on time, and otherwise deal responsibly with your credit, your credit score should not only increase over time, but providers will be able to see your efforts clearly.
So, what can you do to affect positive change on your credit score? While improving your credit score will take time, making little changes to the way you deal with your finances could have a big impact in the years to come.
Make sure you make credit repayments and pay bills on time
Even if it means only paying the minimum on your credit card one month, that’s better for your credit score than missing the payment entirely. Work out a budget that allows you to cover your outgoings, set reminders for each due date, and set up automatic payments if you feel that would work for you.
Think carefully before applying for any new credit
Whenever you apply for credit, the application is noted on your credit report. Whether your application is approved or declined is also recorded, and both can affect your credit score. With that being said, if you are applying for a cheaper product or one that will put you in a better position financially, the change may ultimately improve your credit score in the long run.
Lower the limits on your credit cards
You may want to consider lowering the limits on your credit cards. While credit utilisation (the ratio of used credit vs. available credit) is important, potential lenders will also look at the total amount of credit you have available to you. Higher available credit limits equal higher risk, even if you know you would never spend up to that limit.
Keep worthy credit card accounts open
As long as you can manage your credit cards, keeping them open can be beneficial. With a low credit limit, effectively managed credit cards that are paid off regularly can be viewed more positively by credit reporting agencies, making those users seem lower risk than say, someone with no credit cards in use.
Pay down existing loans and debts
As you work on consistently repaying your loans and other debts, this will reflect positively on your credit score. But remember, even after a credit account has been repaid, it will remain on your credit report for some time and could continue to impact your credit score.
Check your credit report for errors
Spend time looking over your credit report, while checking for any errors. These may include incorrect debt amounts or duplicate debt listings, missed repayments that you made on time, and debt you didn’t apply for (this could be an indication of identity theft or other fraudulent activity). You can apply to have errors corrected directly with the credit reporting agencies.
Consider seeking the assistance of a financial counsellor
If you’re having trouble getting on top of your finances – or even if you’re not – seeking professional financial advice could get you back on track, while also helping you improve your credit score.
Disclaimer: The information contained within this post is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.