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Credit Where It’s Due – Part 2

Comprehensive Credit Reporting (CCR) – Adapting Your Finances to Perform Under New Rules

Part 2 of 2

The full extent of Comprehensive Credit Reporting (CCR) in Australia has drastically changed the way banks and lenders assess your creditworthiness. Yet many Australians still aren’t sure how this new system of transparency impacts their finances.

Data is now being shared widely among banks and ratings agencies. In this second of our 2-part report, we’re going to drill a little deeper into how CCR works.

We’ll look particularly at the importance of cash flow as evidence of your ability to service greater loan obligations and business growth considering the changes.

As we covered in part 1 of this report, the new system of CCR reflects comprehensive data on things like:

  • your previous 2-year loans
  • credit limits
  • repayments
  • schedule of payments and
  • any overdue amounts on balance

Under the new system, all loan enquiries, whether approved or rejected, will count towards your overall credit rating. See part 1 of the report for the rundown of what’s changed and why.

An opportunity for bespoke credit facilities

In many cases, the sharing of information among lenders could create a significant boost in competition for your debt. Armed with a clearer picture of your credit worthiness, you may find the banks offering as beneficial options for you as possible to retain or secure your business.

Of course, the flip side of that is that lending institutions will find some of their clients no longer meeting eligibility criteria for credit. Borrowers may fall into higher risk categories. If you’re unfortunate to fall into this group, you may find credit options restrictive. Worse, you may find yourself slugged with higher interest rates.

The good news is, it should be easier under CCR to repair your credit than ever before.

Whatever your current credit rating in the new system, the important thing is to make the most of the new opportunities available to you. We’re happy to tailor some advice specifically to your situation. Just get in touch for an obligation-free chat about how we could help.

Meanwhile, here are a few steps you could take today.

Using the new system to your advantage

We already mentioned that punctuality in repaying your debt now carries significant weight in your credit rating.

Let’s look a little more deeply at that, because it represents a fundamental shift in how we all should be managing our finances.

As part of a more accurate and responsible approach to lending, your bank now needs to consider your cash flow as a primary factor for making an assessment. And an accurate picture of your cash flow takes into account patterns. Hence a focus on such small details as punctuality of every repayment.

As we’ve seen in the softening of Melbourne’s property market last year, assets like real estate can experience a loss over time. So, it probably doesn’t make a lot sense to base credit worthiness on a borrower’s asset portfolio, particularly assets that may offer low liquidity in a time of crisis.

 

Asset rich, credit poor – 2 key implications for your financial management

The new regime is clearly creating new rules. New rules mean you may need to adapt to a new structure. 

There’s one adaptation we’ve found many clients should make fast.

Cashflow conservatism

Prior to CCR, missed payments of shorter than 60 days were not reflected in the reporting data.

Now there’ll be red flags on any delay in payment of more than 14 days. The good old days of flexibility on commercial credits and harmless delays in repayment are gone.

Any pattern of mismanaged cash flow can impair your CCR rating. It’s important that you reduce this risk when it comes to managing personal or business finances. That means liquidity.

SMEs with unstable cash flow will need to generate some reserves to ensure regular repayments before applying for a new loan. As the new reality sinks in, this will likely lead to a trend toward fiscal conservativism across many sectors of Melbourne business.

In the short to mid-term, we may see this lead to a lack of liquidity in various markets. As businesses reallocate some funds away from regular business growth, to be stored in more defensive liquid asset forms.

This may lead to some profitability loss in the short term for Melbourne SMEs, but in the longer term it may create more options in the form of more credit available and potentially favourable pricing options for those who practice a conservative approach to their spending.

A plan of action: what can you do?

The bad news is that under CCR, if your credit isn’t in tip top shape, every lender who adopts CCR will know about it – in detail. The good news is there’s a lot you can do to repair your credit.

So how do you make the most of this new environment?

The first step to improving your credit rating is to know where you currently stand. You can check your credit report yourself once a year or if you have been refused an application for credit.

It can take up to 10 days to receive a copy of your report – or faster if you do it online. We find the online process at Get Credit Score to be fairly simple. You can use this to check your rating.

Get Credit Score gives you the information that your Equifax (formerly known as VEDA) credit report shows. This includes your credit history, and various other bits of information that can affect your credit rating:

  1. Employment records
  2. Current open credit limits
  3. Lenders you’ve applied for, with credits detailed in amounts
  4. Regular repayments you’re making

Alternatively, you could contact the rating agencies directly. There are three credit bureaus in Australia: Experian, Equifax and Check Your Credit ( Illion).

Source: https://www.moneysmart.gov.au/borrowing-and-credit/borrowing-basics/credit-reports

What’s my credit rating and how do I compare?

So, what does a great credit rating look like? Well, depending on the rating agency, you can get a maximum credit score of either 1,000 or 1,200.

Then, classifications fall into 5 main categories:

  • Excellent
  • Very good 
  • Good 
  • Average 
  • Below average

Curious to see the average credit score in Melbourne and find out how do you rank? Figures released by Experian in 2018 show Victoria enjoying a solid second highest score in the nation. We like this graphic by Monefly for a snapshot of how Australia’s states compare.

Source: https://www.monefly.com.au/au/ever-wondered-how-your-credit-score-ranks-against-other-aussies/

Tips to improve your credit rating ASAP

If you’ve checked your credit rating and you’re now beaming with fiscal joy, then more power to you.

If you’ve checked your credit rating and you don’t like where it stands, fear not, there’s a lot you can do under CCR to get yourself on a firmer financial footing:

  • Review your own comprehensive credit report before applying for a new loan. Knowing your chances and assessing your own risks can help you make the right move at the right moment – and delaying if the time isn’t right.
  • Found errors in your credit report? Take action fast. You can apply to the resolution center of each credit reporting agency to correct the record.
  • Harness positive repayment history to help repair your credit. Experienced negative credit events like default? In the past, your history of individual payments wouldn’t help. Now, under CCR, every time you make a loan or credit card repayment on time, it boosts your credit rating – so when you can, make sure you do.
  • Pay down or consolidate your debts before making new applications. If you have overdue payments or a large load of debt, consider paying-off smaller debts or consolidating larger ones before making further credit applications.
  • Limit the number of organizations you apply to for credit. The new system means lenders have a complete picture of accounts that you’ve opened and closed. Keeping these to a minimum can help you improve your profile as a borrower.
  • Lower your credit limit with existing creditors: The lower your credit limit with existing lenders, the less likely you are to get into trouble, so the better your overall score. Lower your limit where you don’t need the extra credit to improve your application where you do.
  • Practice principles of sound financial management. Fiscal discipline, regular savings and cutting down on impulsive spending will all reflect on your comprehensive credit report.

Remember, demonstrating your financial responsibility can increase your chances of getting approved. In some cases, it can even get you lower interest rates.

Want to find out more? See how our insights could help you to structure your finances in line with the new rules. Get in touch today for an introductory consultation that’s tailored for your situation. We’ll explain what could work well for you and give you the rundown on how we could help. Then we’ll leave it up to you to decide whether we’re a good fit and how you’d like to move forwards.

Disclaimer: This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.



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