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MFAA Prosper : Mortgage and Finance Brief 13
For a mortgage broker, there’s nothing more frustrating than spending time preparing and submitting an application, only for the lender to decline it due to a credit problem. What can often add insult to injury is learning the problem in question is something quite small – such as a paid default to a phone carrier – that could have even taken place years before. For your client, this can be very difficult to comprehend; after all, such a listing may not represent their current financial position or ability to service a loan. Being refused finance can be highly confronting and it can often breed a feeling of distrust towards the broker. This suspicion can be a ver y hard position for a broker to recover from. Ultimately, it could lead to the loss of the client. It’s crucial that brokers understand credit scoring and, particularly, how different events impact a client’s credit score. Veda Advantage, the credit-reporting agency, has developed a credit scoring system, Veda 1.1. It takes many factors into account, including a client’s previous credit enquiries and negative listings, age, employment history, and even changes of address. The programming behind this system is a tightly-guarded secret, however, some general principles can be explained. Credit scores start at -200 and finish at 1200; the lower the score, the higher the perceived risk. A score of 200 represents odds of 1:1, which equates to a person having a 50% chance of having an adverse event on their credit file within the next 12 months. The odds double with every addition of 100 points, meaning a person has less chance of experiencing an adverse credit event. For example, a person with a credit score of 300 would have a 33% chance of having an adverse credit event within the next 12 months. He or she would not have an easy time securing finance. Cr edit reporting in Australia is very much a ‘guilty until proven innocent’ process. As soon as a negative item is recorded, the individual’s credit score will be negatively affected, even if the listing is incorrect. This situation often results in a person being financially disadvantaged for years. Veda Advantage is not necessarily responsible for the accuracy of data entered by its subscribers and it is potentially damaging for a credit provider to list an incorrect or inappropriate credit listing. There is significant legislated protection in place for consumers, but many people – including credit providers – lack a sufficient understanding of this. Repairing the damage So, what can be done about it? Unfortunately there is no simple answer. The state of the world’s economy, and in turn the Australian financial markets, would suggest that restrictive lending policies will continue for some time. The most effective way for a broker to help clients restore their cr edit rating is to deter mine the validity of the credit listing in question. If the listing is incor- rect, it can be successfully challenged and permanently r emoved from a credit report. This will result in instant adjust- ment of the credit score. Some credit providers do question the credit restoration process, as they fear it has the potential to undermine their credit process. Genuine credit repair is about helping the victims of genuinely incor rect or faulty credit listings, which therefore ar e not a true repr esentation of a person’s cr edit worthiness. Credit providers have nothing to fear from reputable cr edit repair companies, while mor tgage brokers and their clients may have much to gain. ••• John Dickinson is the Director of clean credit, a member of the newly-launched credit repair institute of australasia. knowledge centre Credit scoring: the inconvenient truth By John Dickinson With lenders looking to minimise risk in the current market, it is vital for brokers to understand their clients’ credit scores and how they can repair credit listings. 54 Mortgage & Finance brief photosthinkstock
Mortgage and Finance Brief 12
Mortgage and Finance Brief 14