Australia’s positive credit reporting system is bad news for people in a pressure situation.
Aussies are financially stretched and strained right now. While the good news is that the next interest rate move may well be down, the bad news – and my warning today – is that your short-term coping strategy for your finances in the interim may cause long-term damage to your credit score.
Let me explain and suggest a far better way. For a decade or so now, Australia has had an American-style credit score system. It’s what’s called a positive credit reporting system. And it may not be positive – particularly in a pressure situation – at all.
The ‘sensible’ score sinker
A positive credit reporting system means most of your financial behaviour is reflected in your report and, therefore, factored into your score. The previous system was ‘negative’, which meant only your transgressions fed into this make-or-break money number.
Yes, you are still in trouble if you are more than 14 days late with a credit payment or if you are 90 days late with another bill. These reliability red flags will depress your score for two years and five years, respectively.
But here’s the thing: if you’re looking for credit to tide you over during tight times – such as a credit card with free frequent flyer points – read on before you hit ‘apply’.
How applications hurt you
You will have previously been told that a credit card will give you ‘runs on the credit bureau board’. In other words, it establishes a credit record and rating and is an important step to getting important things like a home loan.
This is still true. But, under today’s more rigorous regime, if you apply too often, it will hurt you badly.
So, how many times is too often? That is part of the problem: the complex algorithms that underpin our credit scores are not disclosed. Australia’s three credit bureaus have three different algorithms, as well as three different possible top scores.
How to detect if you are in danger
It’s safe to assume that two applications for credit a year, spaced six months apart, will not hurt your credit rating, but no more. Apply three times or more, consecutively or concurrently and it could prove a big problem. Certainly do not apply immediately after being rejected for other credit. This will set off alarm bells that you are a bad credit risk and/or casting around in desperation.
Keep in mind that it is smart money management to transfer any existing credit card debt – on which you might even pay an ear-bleeding 18 per cent interest – to a new institution offering an interest-free balance transfer. You can currently get such deals for up to 34 months (from BankWest’s Zero Mastercard and Zero Platinum Mastercard).
You should use that time as a window of an amazing opportunity to clear your balance without paying an extra dollar in interest. If you don’t manage that within the 0 per cent period, a second transfer at that stage shouldn’t affect your credit score. Even a third, provided it is after the 34 months, might be OK.
However – returning to where I started this warning piece for you – under our positive-reporting regime, a potential credit provider will see your previous applications and whether they suggest you have no intention of sticking with their product. They might not, as such, be predisposed to approve your application. And there’s one thing that will damage your score for sure: rejection.