Credit ratings and scores are extremely important. They can determine whether you'll receive a loan and can strongly influence the interest rates and other terms and conditions. But it turns out, when it comes to your credit report, you're not the master of your own destiny.
Earlier this year, Jack (not the person's real name) applied for a loan through an online service that matches loans to borrowers. The site in question was offering loans at specific rates and Jack needed to borrow some money for a car loan.
After filling in all his details, Jack was told that he wasn't eligible for the advertised rate as his credit rating was below the provider's threshold for the low rate. When he asked what the problem was, he was told the issue was that he had previously applied for a number of credit cards, over a short time, and those applications were left open even though he hadn't signed up for them.
Each application, that wasn't closed off, was a "black mark" on his report. And that was despite earning a salary in excess of $100,000, owning a property worth $650,000 and never having defaulted on a loan or missing a payment.
After receiving the loan, at the slightly higher rate, Jack wanted to look at refinancing his mortgage. He went to the same borrower, having now established a relationship with them, but was refused a loan. The reason was that his rating was a 480 but needed to be over 500 for that borrower.
That prompted Jack to order his credit report and look at what was going on. What he discovered was that each time an inquiry was made against his credit history, his score was penalised. Let's make that 100% clear.
Checking your credit score causes it to fall lower
This is confirmed in this infographic from Get Credit Score.
Those negative reports, that come from having your credit checked stay on your report for five years. So, each time you look to switch phone carrier, power company, credit cards or anything else that triggers a credit check, you're penalised.
It does get a little more complex. There are two main types of credit enquiries: "soft" and "hard" enquiries.
When you request a copy of your report, that generates a soft enquiry that doesn't have an impact on your credit score. But a hard enquiry, which is one made by a third party, such as a lender is recorded on your credit history. While the odd one doesn't really make a difference, a number of them, in a short time frame, collectively creates a negative impact on your score. This is what Jack found on his report.
As Equifax puts it:
You may have a credit report even if you have never applied for a loan. This is because contracts for mobile phones, electricity or gas are a form of credit. Interest free store finance that you might use for a TV or white goods may also amount to credit.
So, what can you do?
Firstly, you really need to pay attention to the terms and conditions when you make inquiries for services that require a credit check. And don't apply for credit cards and abandon the process. Those open applications hit your credit report and stay there for five years.
It's also worth applying for a copy of your credit report. You can do that through the various agencies that provide credit reporting services. The Office of the Australian Information Commissioner has a list of those providers. They are
- Equifax (formerly Veda) - 1300 762 207
- D&B CheckYourCredit - 1300 734 806 (no online checking)
- Experian Credit Services - 1300 783 684
Those services allow you some free checks before paying and also offer alert services to let you know when someone is launching a check against your record.
If you see something on the report you don't understand or is in error, contact the organisation that made the report and seek to have it resolved.