The Bad Credit Story

What does the bad credit story mean?

Whenever a bad credit lender considers a new application they invariably want to know why the applicant fell into difficulties in the first place. Although not every lender goes down this path, if there is a good reason for the bad credit file then it is a good idea to disclose it up front.

Telling the story is an important part of the assessment process because it gives the lender an opportunity to determine whether or not a borrower will be a good candidate for a home loan.

Once a lender examines an applicant’s credit file a story begins to emerge. The lender can see how many applications for credit have been made over the last five years and there will be details of any court judgements, default listings or bankruptcy processes listed in the file as well. Any defaults that have remained unpaid will stay on the file until payment has been made but all defaults which have been paid will drop off the file after five years have passed.

Some commentators have argued that credit files should have no life and that every aspect of a person's credit history should be left on the file for the duration of the person's life. This, they claim, gives lenders a better opportunity to assess a person's eligibility for a loan and could prevent fraudulent activities and prevent credit being given to applicants who have a demonstrated record of being irresponsible with their finances.

On the other hand however, other commentators argue that it is a breach of a person's right to privacy to keep records longer than five years. It is argued that if an applicant has had a good record for five years then this is a better indicator of the person's capacity to repay a loan. After all, indiscretions committed as a teenager may have no relevance when a person is finally established in a job, even a profession, at a later stage in life.

In any case there are several reasons that a person's credit file may look bad.

Here are some of the things that could influence a lender in assessing credit file.

Sickness or accident which prevented the applicant from gaining or retaining employment for a period of time where loan repayments fell behind.

A bankruptcy that occurred in a business in which the applicant is no longer involved. This is especially important when they are now in salaried employment and not exposed to the vagaries of self-employment.

Involvement with a business or life partner who failed to fulfil their obligations in contributing to a loan repayment.

Being the subject of a fraudulent transaction.

Any unusual circumstance which may have contributed to a person's incapacity to make repayments on time.

There are also some instances where a lender will be prepared to overlook an adverse listing on the credit file including:

Small paid defaults to a telephony company. Some of these companies have a reputation for listing defaults without giving clients adequate opportunity to make amends.

Bankruptcies that occurred during teenage years because of unusual circumstances. This is especially the case where the applicant has demonstrated a consistent record of long-term steady employment coupled with an accumulation of funds in a bank account evidenced by statements.

In other words, if there is a good reason for bad credit history, the lender should be told about it chapter and verse.

Although some lenders ignore the story and consider only an applicant's current circumstances, a good story may still influence a lender's commercial judgement which may result in a lower interest rate being applied to their loan.

Some lenders are ‘policy bound’ in that they have no flexibility when it comes to considering an application. This means they will ‘do it by numbers’, and count the number of credit defaults, mortgage arrears, and court judgements and determine the interest rate that will apply to the loan approval based only on this information.

Other lenders however may be convinced by the story and, although they will still use internal policy guidelines to determine the risk rating of the applicant, they might decide to be a little more flexible.

Mortgage brokers can be extremely helpful in putting together a strong application to a bad credit lender and it is highly recommended that you talk to a broker about the chances of success and making sure you have every piece of documentation required to obtain a loan approval.

It is an adage that bad things happen to good people occasionally and it simply makes sense to listen to the reasons why a person experience financial difficulties that resulted in the bad credit file. Lenders who take the view that this is the case are more likely to give you a loan approval.

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