Personal Finance interest rates determined by your Credit Score – Fad or here to stay?
Much has been made in the media recently about the comprehensive credit reporting regime introduced into Australian market this year and a wave of new lenders in the Australia personal lending marketing promising interest rates based on your personal credit score. What does all this mean for you, the consumer? Is this something new, is it a new way of looking at something old or is it just a marketing ploy? This article aims to answer all these questions.
Just last week, the launch of www.getcreditscore.com.au had enough fanfare that the site crashed on Day 1 due to the amount of traffic it received. Get Credit Score provides consumers with their Credit Score instantly & free of charge. But for what benefit is there in knowing your Credit Score? What is a Credit Score? And how is it determined?
A Credit Score is a number between 0 – 1200 calculated by an algorithm developed by the credit reporting agency the Veda Group which aims to give an easy to understand ranking of your risk profile based on the information contained on your personal credit file. The higher the Credit Score, the less risky you might be for a financier.
Before the advent of Get Credit Score you could pay a fee to Veda Group and get a copy of your full personal Credit File or you could wait 10 days and get it free of charge. Now with Get Credit Score you can get your Credit Score instantly but still need to pay a fee to receive your full report.
Get Credit Score is a site backed by a new player in the personal lending market, Society One. Society One is a peer-to-peer lender in that it collects funds from investors and then matches those funds to consumers in the way of loans. It is interesting to note that Society One is part owned by Westpac Banking Corporation.
While Society One claims that by knowing your Credit Score you, as a consumer, are better informed & therefore can negotiate better rates on future lending. However, it could be argued that this information has already been available to you in the past. The ability for consumers to negotiate rates on personal finance is nothing new and one of the reasons to use a finance broker when in the market for new lending.
A Credit Score is only as valuable as the information contained in your Credit Report. And while the new credit reporting regime promised to be a new dawn for positive reporting in Australia, the reality is that for financial institutions and utility companies it is not mandatory in the new legislation to provide credit reporting agencies, like Veda Group, with positive customer data, which is undermining its effectiveness.
Therefore, in its current format, a Credit Score does not take into account important aspects of a consumer’s profile. Such things as amount of assets owned, amount of net income earned, length of tenure in current employment, any late payments on current loans and utility bills amongst other things are not included on a Credit File or included in a Credit Score.
Under the current Consumer Lending Legislation a lender must make all reasonable enquiries as to the creditworthiness of an applicant and their ability to meet current & future commitments without financial hardship. Basing a credit decision on just a Credit Score alone does not satisfy these legislative requirements.
Perhaps over time, new lenders like Society One will gain greater relevance in the lending industry as credit reporting becomes more comprehensive. For now, the age old adage that it pays to shop around for the right car finance still plays true for todays consumers.