Credit scores, credit reports and home loan applications

Credit reporting in Australia is governed by Part IIIA of the Privacy Act 1988 and the Privacy (Credit Reporting) Code, and it is more tightly regulated than most borrowers assume. There are strict limits on what may be recorded, how long it may be kept, and what a credit provider must do before listing a default. The Office of the Australian Information Commissioner publishes the rules, and they are worth knowing because a great deal of what circulates about credit scores is wrong.

Two corrections at the outset. First, there is no single national credit score. Three credit reporting bodies operate in Australia and each calculates its own score from its own data. Second, lenders assessing a home loan look at the underlying report far more closely than the score. A score summarises; the report is what is actually read.

What a credit report contains

The OAIC sets out the categories of information that may appear in a consumer credit report. They include identifying details such as name, date of birth, sex, current or last known address and the previous two addresses, the name of the current or last known employer and driver licence number. Beyond identification, the report may record:

• the credit providers that have provided consumer credit, and whether they are licensed by ASIC;
• the type of credit provided, the date it was made available and, where relevant, terminated;
• the credit limit and limited information about repayment and interest obligations;
• repayment history information, showing whether payments were made on time or missed;
• financial hardship information, recorded against repayment history information;
• information requests, commonly called credit enquiries, recording that a provider accessed the report in connection with an application, and the type and amount of credit sought;
• defaults on a consumer credit payment of $150 or more where the payment is at least 60 days overdue, and a note where such an amount has since been paid;
• court judgments relating to credit, and information from the National Personal Insolvency Index including bankruptcy and debt agreements;
• a credit provider's opinion that the person has committed a serious credit infringement.

Some categories are conspicuously absent. Income is not on a credit report. The OAIC states that a credit provider may not give a credit reporting body information about income for inclusion in the report, although it may still use that information in deciding whether to give credit. Savings balances, assets, employment history beyond the current employer, and any record of having been declined are likewise not recorded. What is recorded is that an application was made, not its outcome.

Repayment history information

Repayment history is the most influential single element for a home loan application, and it is also the most misunderstood.

The OAIC explains that repayment history appears as a number from 0 to 7 showing the age, in months, of the oldest missed payment, and that a person is considered to have missed a payment if they make it more than 14 days after the due date. The information remains on the report for two years.

Two consequences follow. The first is that a payment made three days late is not recorded, so the 14 day grace period is genuine. The second is less comfortable: the OAIC states that a credit provider is not required to send written notice before listing a missed payment. A borrower can accumulate several months of adverse repayment history without ever being told, and discover it only when a home loan application is assessed.

Only licensed credit providers may supply repayment history information. Utility and telecommunications companies may list defaults but not repayment history, which is why a late electricity bill affects a report differently from a late credit card payment.

Defaults and the notice requirements

A default is a far more serious entry than a missed payment, and the conditions a credit provider must satisfy before listing one are specific. The OAIC states that a default may be listed only where all of the following apply:

• the payment has been overdue for at least 60 days;
• the overdue payment is $150 or more;
• a notice has been sent to the person's last known address advising of the overdue payment and requesting payment;
• a second notice was sent at least 30 days later, advising that if payment is not made the provider intends to disclose the information to a credit reporting body;
• the provider has waited at least 14 days after issuing the second notice.

A credit provider also cannot wait more than three months after issuing the second notice to list the default. The OAIC notes that a provider is considered to have complied with the notice requirements if it can show the notices were sent to the last known address, and that notices may be emailed where that is the usual method of correspondence. Where notices were sent to an old address that was not the last known address, the listing may not be valid, but where the address was out of date because the person failed to update their details, the provider is likely to have met the requirements.

Paying a default after it has been listed does not remove it. The OAIC states that the listing remains and the provider updates it to show the payment was made. A paid default is viewed more favourably than an unpaid one by most lenders, but it remains visible for five years.

Hardship assistance and credit reporting

Requesting hardship assistance does not damage a credit report in the way many borrowers fear, and the protections are specific.

The OAIC states that where a person makes a request for hardship assistance, a credit provider may not list a default while it is deciding the request, or until 14 days after telling the person it has refused the request. The exception is where the provider reasonably believes the request was made on the same basis as a hardship request made during the previous four months.

Where a hardship arrangement is agreed, it is recorded as financial hardship information against the repayment history, and that information remains on the report for one year, compared with two years for repayment history and five for a default. The arrangement therefore leaves a lighter and shorter mark than the default it may prevent. The practical implications are set out in the guide to financial hardship assistance for mortgage holders.

How long information stays on a credit report

Retention periods are set by the Privacy Act, and the OAIC publishes them as follows.

Type of information	Retention period
Repayment history	2 years
Financial hardship information	1 year
Current consumer credit obligations	2 years from the end of the credit
Credit enquiry	5 years
Default	5 years
Court judgment	5 years
Bankruptcy	The later of 5 years from the day bankruptcy began, or 2 years from the day it ended
Debt agreement	The later of 5 years from the day the agreement was made, or 2 years from the day it was terminated, ended or declared void
Serious credit infringement	7 years

The five year retention of credit enquiries is the item that most often affects an otherwise clean application. Every application for consumer or commercial credit creates an enquiry, and a cluster of enquiries in a short period reads as a borrower shopping under pressure, regardless of whether any of those applications was accepted or even proceeded with. Applying to several lenders at once in the hope that one will approve a home loan is therefore counterproductive.

The three credit reporting bodies

Three bodies operate in Australia: Equifax, Experian and illion. Each holds its own data, receives information from a different subset of credit providers, and calculates its own score on its own scale. Equifax publishes a scale to 1,200; Experian and illion use scales to 1,000. A score from one body cannot be compared directly with a score from another, and a report from one may contain information the others do not.

The OAIC states that a credit report can be accessed for free once every three months. Because the bodies hold different data, a borrower preparing for a home loan application is best served by obtaining a report from each rather than relying on one. Free reports are obtained directly from the credit reporting bodies; paid subscription services are not necessary to exercise the statutory right.

Credit providers are not required to obtain consent before accessing a report. Section 21C of the Privacy Act requires them to notify the person that they are likely to provide information to credit reporting bodies, which is generally satisfied through a statement of notifiable matters and a privacy policy published on the provider's website.

What lenders do with the information

For a home loan, a score is a starting filter rather than the decision. Lenders read the report itself, and the items that attract attention are, broadly in order:

1. Defaults, judgments and insolvency. Most mainstream lenders will decline while an unpaid default is recorded, and many are cautious for a period after it is paid. Specialist lenders may consider such applications at a higher interest rate.
2. Repayment history. Recent missed payments on a mortgage or a credit card carry more weight than older ones, and a pattern matters more than an isolated instance.
3. Enquiry volume and type. Several enquiries in recent months, particularly for small amount credit or payday lending, are treated as an adverse signal.
4. Credit limits. The limit on every card and line of credit is assessed as a commitment in serviceability whether or not it is used, as explained in the guide to how much you can borrow.
5. Buy now pay later arrangements. The OAIC notes that these are a type of credit under the National Credit Code and may appear on a report. Instalments visible in transaction statements are commonly treated as commitments in any event.

Correcting errors

Errors occur, and the right to have them corrected is free. A person may ask either the credit reporting body or the credit provider to correct information, and the recipient must consult the other party as necessary. There is no charge for a correction request.

Where a correction is refused, or where there is no response within the required period, the matter may be taken to the Australian Financial Complaints Authority, which is free for consumers, or to the OAIC. Commercial credit repair services charge for work an individual may do at no cost, and they cannot remove information that is accurate and validly listed.

Fraud is a separate case. Where a report shows credit a person did not apply for, a ban period can be placed on the report to prevent further access while the matter is investigated.

Preparing a credit report before applying

For a borrower intending to apply for a home loan, the useful sequence is as follows.

1. Obtain a free report from each of the three bodies, several months before applying rather than days before.
2. Check identification details, since mismatched addresses and misspelled names cause mismatched files.
3. Dispute anything incorrect and allow time for the correction to be processed.
4. Pay any outstanding default, which will not remove the listing but is viewed more favourably.
5. Stop making credit applications. Each creates an enquiry visible for five years.
6. Reduce or close unused credit limits, which improves serviceability as well as the report.
7. Establish three to six months of clean repayment history, including on buy now pay later arrangements, by setting up direct debits with a small buffer before each due date.

A credit report with a default is not an automatic barrier to a home loan, and a high score is not an approval. The report is one input into an assessment that also considers income, expenses, deposit and the property itself, described in the guide to the home loan pre-approval process. A broker can indicate which lenders may consider a particular credit history before an application is made, which avoids creating further enquiries through applications likely to fail. Borrowers who would like that assessment may request a free assessment.

This article summarises the credit reporting rules published by the OAIC and is general information rather than personal or legal advice.