Noel Whittaker FCPA FAIM FTIA AFPA, writes for established reputable newspapers, has made tv appearances, and broadcasts on ABC radio. In 1998, he was awarded the title of Australian Investment Planner of the Year. In his international best seller “Making Money Simple”, Whittaker explains using simple easy-to-understand language on Credit Ratings.

“When lending organisations are considering making a loan they look carefully at the applicant’s ability to repay it. It is not their business to be taking risks with their shareholders and depositors’ funds and there are certain areas they will look at critically before making a decision.

These include:

  • Length of time at the present address and at the present job – stability is preferred.
  • Level of income – obviously the applicant must be able to afford the loan repayments.
  • Marital status – stable people have proven to be better payers.
  • Asset accumulation – people who have built up considerable assets are proven better credit risks.
  • Type of employment – in occupations (such as commission selling or small crop farming) where income can be uncertain, borrowers may have trouble making repayments.
  • How the applicants have repaid previous loans – lenders have found that good payers tend to stay good payers – bad payers also tend to remain bad payers.

Credit ratings and credit history come into importance when the last item is being considered. When making a loan application the client will be asked details of any previous borrowings and whether they are still current or paid off. Normally staff of the loans approval department will then telephone the other lenders and ask for details of how the applicants have conducted their accounts. If they hear comments like “slow payer” or “never pays until final notice is sent” the chance of getting a loan lessens. No lender wants the bother of borrowers who have to be chased continually for money.

This is what happens when a lender calls the credit bureau.

  1. The lenders code is asked for and verified. This prevents unauthorised persons from obtaining information.
  2. The applicant’s full name, sex, date of birth, driver’s license number, occupation and last two addresses are given. These items are included to ensure proper identification.
  3. The enquirer is asked what the person is asking for. This is recorded on the applicant’s file.
  4. In exchange for this information the credit bureau advises details of all other information on file. This includes all other application for credit and detail of any “delinquencies”.

A “delinquency” is something that indicates a past problem. It could be a judgment, repossession, bankruptcy or the fact that the person had “skipped” –  owing money without leaving a forward address.

Note the file contains only applications for credit and details of any delinquencies. It does NOT state whether any of the recorded applications were approved, declined or proceeded with. The file merely shows that, at some stage, the applicant was considering getting a loan.

You can now see there are two elements that make up this term “credit rating”. One is the history of the way in which loans have been repaid in the past – this is available only from those lenders the applicant has dealt with. The other is details of applications for finance, and delinquencies that come from the credit bureau”. Whittaker, N. (2003). Making Money Made Simple. Australia: Simon and Schuster.

Submitted by Karen Colquhoun-Smith for www.HowTo-BuildCredit.com