How can a credit card affect your personal credit score?

There is a common misconception in Australia that by having a credit product, such as a credit card, that you are building up your credit score. While this is true in the USA, this is not yet true in Australia. While sometimes a lender will look at your conduct on credit accounts when making a decision, having a credit product just for building up your ‘credit reputation’ may actually reduce the amount you can borrow as your credit card repayments are factored into your loan affordability.

Australia uses ‘negative’ credit reporting. This means that when a potential lender checks your history, they only see the negatives. They will see any other requests for enquiries on your credit report, who / where it was and the amount you were enquiring about. Potential lenders will also see any defaults on your account, such as a phone bill that you haven’t paid from months ago.

Potential lenders will not see, unless they have specifically requested them for you, the positive conduct you’ve had on all of your obligations, or even which of those enquiries actually resulted in you taking out a new loan. And they will certainly not see a ‘score’.

What can you do to look better to a lender?

While you don’t have a credit score per se, your credit report can still impact whether or not your loan may be approved. If you have enquired credit several times in a short period, this suggests that you haven’t been approved at other lenders and could be a ‘red flag’ that you may be a riskier borrower. This doesn’t mean you should never request credit, but if you’re applying for three credit products in quick succession this could be looked at negatively.

Additionally, do not let yourself get into default with a company. If you are disputing a bill with a Telco company, for example, it may be better to pay it and then lodge a complaint, as opposed to refusing to pay altogether.

Will this ever change?

The government has been trying to get ‘Comprehensive Credit Reporting’ in Australia for a few years, and are looking to turn this up a gear after getting very little ‘buy in’ form the industry. This will mean that lenders will have far more access to information, such as your repayment history.

This is an exciting time for some Australian’s, as they will finally be rewarded for their good behaviour.