Credit History

One of the easiest ways for a bank to determine a person's borrowing capacity is to look at their past credit history.

Many potential borrowers mistakenly believe that a good credit history simply means that you have been granted credit in the past by different lenders. In fact, banks have little information about your credit history apart from what you declare in your application.

The credit reporting authority, Veda Advantage, contains a centralised file where every application you make is recorded. Details such as the date on which the application was made, the type of credit sought, and the amount applied for are all recorded so that subsequent lenders can get an idea of an applicant's history. There is however, no record available that shows the status of any current accounts. In other words a lender cannot be certain that loans applied for are still active or not. They have to rely upon what you tell them in your application form.

The only important information that a lender can gather from an applicant's credit history report is how many times credit has been applied for and whether or not there have been any defaults, judgements or bankruptcies. In most cases, any evidence of defaulting on a loan will be met with a very dim view from the bank and it is unlikely that anyone with a bad credit history will have a home loan application approved.

One of the most common instances of bad credit history coming back to bite an applicant is where they are unaware that there is a default on their credit file. Many applicants claim that their credit file is incorrect when a default is disclosed stating they have no knowledge of it. This is particularly case when it comes to unpaid phone bills and suchlike.

Here is a typical scenario.

Many young people move into share accommodation to cut expenses but usually someone has to sign up for a telephone account. In many cases the household changes over the years and people move on, but if the telephone bill remains unpaid and the account holder has not advised the telecommunications company of their new address, the outstanding bill is eventually listed as an unpaid default which will not become evident until the person applies for more credit.

If the amount of money involved is relatively small, for example less than $500, it may be acceptable to some, but not all, lenders. But if there are larger amounts of money involved or there is more than one default, it is unlikely that a home loan application will be considered.

If the amount of money involved is relatively small, for example less than $500, it may be acceptable to some, but not all, lenders. But if there are larger amounts of money involved or there is more than one default, it is unlikely that a home loan application will be considered.

Always make sure that service bills such as phone and mobile accounts are paid in full and on time.

If you change address, make sure every service provider is advised, especially credit card providers and any telephony accounts. Don't forget store credit card providers like David Jones or Myer.

Sign up at Veda Advantage for the e-mail alert service which will advise you whenever a change is made to your credit file. This helps you stay on top of any problems and can also serve to guard against any fraudulent entries on your credit file.

Terminology

Here are a few terms you should become familiar with before you can read your credit file with a great degree of understanding.

Default. A default listing occurs when you do not make a payment on time. Normally a default listing is not made until three attempts have been made to contact you. Some credit providers however can be quite ruthless in this area and a listing can occur within one month of default.

Judgement. A court judgement is entered on your credit file when an unpaid creditor has taken the issue to court for determination. The court process means that every attempt possible will be made to contact you before the prescribed date, but if you are not present on the day of the hearing a judgement can be entered in your absence. This has the effect of granting the court, namely the Sheriff, the right to seek repayment from you in person or by seizing goods.

Bankruptcy. Naturally, a person who cannot pay their debts can apply for bankruptcy voluntarily or in some cases creditors can force bankruptcy upon you if you do not pay your bills on time. This is the most serious side of credit reporting as the record will stay on your credit file for at least 10 years and in some cases forever. The ramifications of bankruptcy are quite severe and the effect is that no credit provider will be likely to grant credit in the future. Entering into a payment arrangement with creditors is known as a Part IX or Part X agreement. This is where you are allowed to pay your debts off over a period of time under the supervision of an administrator. It is still noted on your credit file as a bankruptcy however.

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