Ignorance of credit scoring leaves consumers vulnerable
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Ignorance of credit scoring leaves consumers vulnerable

A survey of more than 2000 people by comparison site Finder finds that many people have little idea of how credit scores work.

More than one-in-three believes not paying their tax liabilities on time affects their credit score. It doesn't.

Not knowing how credit scores work could lead to a lower score, making it harder to obtain a loan.

Not knowing how credit scores work could lead to a lower score, making it harder to obtain a loan.Credit:Bloomberg

But factors such as not making minimum loan repayments on time do.

This level of knowledge is where we are as Australia is heading towards full implementation of comprehensive credit reporting. Previously, the reports that credit agencies provide to lenders on applicants held negative information only, such as missed payments of more than 60 days and bankruptcies.

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But under comprehensive reporting, late payments on credit cards, personal loans and mortgages of more than 14 days can lead to a black mark on your credit record.

Defaults on payments overdue by 60 days and more than $150 will stay on your file for five years.

Almost one-in-four of those surveyed by Finder believe their credit score would be affected if they did not pay-off their credit card debt, in full, each month. Again, not true.

Instead, it is failing to pay the minimum required amount on your credit card each month that produces a black mark on your credit card.

About 15 per cent of respondents believe their partner’s credit score affected their own.

That is only true if you apply for a loan jointly; where both scores will be considered.

The confusion is not just on what is included on a credit report, but also that credit scores can vary dramatically for the same person, depending on which agency is doing the credit scoring.

Money recently highlighted how consumers can be denied loans or charged different interest rates depending on which credit agency the lender uses.

In one example, someone who wanted to borrow $5000 to buy a used car had a credit score of 260 out of 1200 from one credit agency and 600 out of 1000 from another.

The differences occur because credit reporting agencies are receiving data from different sources and apply different weightings to each type of data – the secret sauce – that goes into each agency’s credit score.

Though comprehensive credit reporting was introduced in 2014, it's been limited because it wasn't mandatory. Comprehensive reporting will only really start when the big banks, who dominate lending, share their data.

The government has prepared legislation to force the big banks to share their customer data with credit agencies, however the legislation is stalled in the Senate as Labor wants a delay over concerns about whether a period of temporary financial hardship will impact a person’s long-term credit record.

In a breakthrough in late June, the Australian Banking Association said, following negotiations with the government, the big banks will start to share their data by the end of September, with the exception of the data of those with whom they have hardship agreements.

The Attorney-General's Department will complete a review of financial hardship arrangements.

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