Making it count: how bills can make your life easier…

So obviously we’re all spending a lot of time at home. Xinja would like to help make this time well spent, by offering a blog series – ‘making it count’ – to help boost your basic financial literacy & get money fit during iso. Today we’re looking at credit scores – something Xinja will be working with as we move towards launching our first lending products in a few months – the basics you need to know plus some myth busting.

COVID-19 – Credit Scores and bill relief….

So we kind of had to start with COVID didn’t we…….Bills…the only things that seem unaffected by this crisis. We might be spending less on eating out and travel, but the utility and mortgage bills keep rolling in for most of us. For many, the ‘bill relief’ being offered is a godsend and a vital lifeline if we need it to get through. But if I use this facility and pause bill payments, will this adversely affect my Credit Score?

The answer is not necessarily. Payment holidays requested because of Coronavirus are generally NOT counting as a skipped payment (which has a negative impact on scores) although simply having less payments going through could detract from a positive score. What is clear, however, is that your score WILL be adversely impacted if you skip payments without going through the process of applying for hardship relief officially, so make sure you contact your financial service provider to get any bill relief properly registered.

(One important thing to remember about payment holidays on loans or home loans – unconnected to credit scores but important none the less – is that ultimately you will generally pay more interest than if you maintained the same regularity of payments.)

So what’s a Credit Score? A ranking

Credit Scores are a way to measure the relative risk of a loan application. The scores typically rank from 0 to 1000 and are an estimate of your likelihood to pay back a loan. They can impact whether you can get a loan, or if offered, at what price. Your score is made up of 2 elements: your loan application details and your payment behaviour. Let’s start with your application.

Application Information

Your application Credit Score is basically a profile that compares you to others that have paid their loans on time. A bit like your score cards back at school. These profiles include things like where you live, how long you’ve lived there and whether you own it, where you work and your household structure. These scorecards (created & maintained by lenders) are regularly monitored to ensure they are performing as expected.

Your payment behaviour

The second element of your Credit Score comes from a Credit Bureau, like Equifax, whom Xinja use. You can check the credit score that’s held on you by bureaux at websites like getcreditscore.com.au (which also has lots of handy information about Credit Scores). They hold up to date information about your payment behaviour like whether your loans and credit cards are repaid on time, how many repayments you missed or how often you’re shopping for credit. It might surprise you that even your phone bills are included. Also included are your gas, electricity and even your internet bills.

Credit Score Myth busting

Credit Scores are one of those subjects aunts, uncles and other ‘experts’ love giving you advice about. Let’s clear up some of the fables with the following facts……

  • A bad credit doesn’t last forever: It will only last forever if you continue to make choices that hurt your credit score
  • It doesn’t take a long time for a Credit Score to go bad: it only takes a few months to ruin a good credit score bad credit doesn’t last forever:
  • Checking your credit doesn’t hurt your score: you can check your credit score as many times as you want without hurting your credit score
  • You don’t have to make a lot of money to have a good Credit Score: income isn’t a factor in your credit score. However, bill payment habits do factor into it.
  • Getting married will not merge your Credit Scores: you and your spouse will continue to maintain separate credit histories and credit scores.
  • Multiple Credit Cards may hurt your Credit Score: applying for lots of credit – and looking credit hungry – can impact your score, but it’s also about your payment reliability. One credit card with a bad payment history vs several where you always pay on time, could harm you more.
  • Not having any debt doesn’t mean you have a good Credit Score: your level of debt is a factor in your credit score, but your payment history is more important.
  • You don’t need to check your score only when you’re applying for a loan: everyone should check their credit scores periodically throughout the year – to verify their credit health.

What’s a ‘personalised’ credit score?

Personalised credit scores take a lot more data into account than typical scores, and more relevant data. Whilst there may be statistical validity in assessing someone’s credit scoring in part by their postcode, isn’t this a bit unfair and discriminatory? Wouldn’t it be better to base it only on your actual financial behaviour? We’ve seen something like this in the car insurance industry in Europe, where some companies offer to tag your car so your premium is based on how and how far you actually drive, rather than your age cohort, for example.

What’s Xinja’s approach to Credit Scores?

To begin with, as we start with our first lending products later this year, we will be using external data sources to assist with the credit scoring we do, as we simply won’t have enough historic data or learnings, or the relevant infrastructure and processes in place, to deliver an alternative model.

However, as a bank, we have access to your financial behavioural data, so ultimately our intention is to create the facility to assess you fairly on that data, and maintain a dynamic credit score that updates with that behaviour. So for example, we’d be able to tell you at any time, what loan interest rate we’d be able to offer you, and even advise you on behaviour that could improve that rate if you want to bring it down.

This is an aspiration – it is still a way off – at least a year from our launching lending, if not longer – but an important part of using your own data to your own advantage.

Let us know what your thoughts on the topic in the comments below!

PLEASE NOTE:
The information in this post is of a general nature only. Your personal circumstances or financial objectives have not been taken into account when preparing this post. This post comes from the Xinja blog: http://xinja.com.au/news-media-blog)

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Great Idea for Blog Series, maybe even a podcast , yes podcast are still COOL haha, But serious great idea for lunchtime read.

The point I’d like to pick up on 2nd last paragraph and the example you give, which is great idea and really what open banking/CDR is about, Letting us use our habits / data to help us be it home loans ect, and once other sectors comes online like Retail Energy, Super funds and otrs ,

All this data will eventually give a more holistic view of yourself.

Maybe the CDR can be topic too,

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Hey @hugobrown yes - CDR is critical - after all arguably open banking is first cab off the rank in open data…We are big supporters and have made submissions on this - one being that consumers should have access to a registry of who has access to their data (a memory of to whom they’ve given consent). We have written on this and will again…

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Regarding initial lending products external data sources will be used. Not sure what these sources are able to share personal financial data except those sources that manage credit files. So you will initially be using credit agencies as an assessment mechanism until Xinja data banks grow?

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Hi @rkyobe we’ll be using our own assessment (from the data gathered via the application process) AND data from a credit bureau, so not just the credit bureau.

I appreciate the reply as it seemed vague before

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