Almost everyone will, at some point, use credit – whether by taking out a money loan or buying something on credit.
'Credit' often involves borrowing money from a lender because you don’t have the savings to buy something straight away. But ‘credit’ can also include other situations like opening up a telephone account and paying the bill at the end of the month.
'Credit is any arrangement where you owe a ‘debt’ to a business and they agree to get paid sometime later.'
Before giving you the loan or selling you something on credit, the business will want to make sure you’re likely to pay back the debt when you have to. To help them do this, the business may get a ‘credit report’ about you.
Experience has shown that even people who are in very similar financial positions (e.g. have roughly the same income and expenses) may have a very different likelihood of repaying money they owe.
Over the years, credit providers have worked out that the chances of someone repaying a new debt is strongly predicted by the way that they have repaid previous debts. That’s why credit providers use your credit report when trying to predict if you’ll repay them what they’re owed.
What is credit reporting?
Life’s big moments are often driven by the ability to get the credit you need, when you need it. People apply for credit every day – to borrow money to buy a home, purchase a vehicle or pay off existing debt. How much you can borrow, and what interest rate you will pay, depends on your credit health.
If you borrow money from a lender (e.g. a bank or finance company) or a business agrees to sell you something now and only get paid for it later (like a post-paid phone contract or your gas or electricity account), they’ll want to know whether you’re going to pay back what you owe them. To help them make this decision, they’ll want to see how you’ve paid back other credit providers. If they don’t think they’ll get paid back, the credit provider won’t lend you the money or sell you the goods or services on credit.
Credit providers include lenders such as banks, credit unions and finance companies, and also businesses that sell you goods or services on credit, like phone, gas and electricity providers.
To help them make the decision, as part of the application process, the credit provider may ask you questions about your financial position, e.g. how much you earn, how much you spend and what loans you currently have.
In addition, they’ll probably ask another business known as a ‘credit reporting body’ to give them a ‘credit report’ about you. This credit report includes information about how you’ve handled other loans and debts before.
Credit reporting bodies are businesses that give credit reports to credit providers to help the credit provider decide whether to lend you money or sell you something on credit
By being credit smart, you can make sure that the information on your credit report makes you look good. This will make it easier for you to borrow money or buy things on credit in the future. It may even reduce the interest that you have to pay when you borrow money.
About credit reports
Your credit report is a record of your credit activity and credit history. It is prepared by a credit reporting body at your request, or at the request of a credit provider when you apply for credit.
At a minimum, your credit report will include information that is needed to identify you, such as your name, birth date, address and employer’s name.
It includes information about your credit history, such as:
- the types of loans and credit that you have applied for in the last 5 years, which is reflected as enquiries from credit providers who viewed your credit report with a credit reporting body
- a breakdown of the accounts that you’ve opened
- a 24-month breakdown of the way in which you pay your accounts – showing if you pay your accounts on time, every month
- whether you’ve ‘defaulted’ (i.e. missed your payments by at least 60 days) on any of your loans or credit accounts
- legal action against you such as a default judgment where a court has ordered you to repay money that you owe to a credit provider.
You can read more about the detail of what can be on a credit report here.
Only some credit providers (e.g. banks, credit unions and other finance companies) will report whether you’ve been paying your monthly instalments on time. This doesn’t apply to phone, gas or electricity companies (although they can still report a ‘default’ on your credit report if you miss your payments by at least 60 days).
By law, your credit report can only be accessed by others in legally permitted circumstances. That is why, when you ask for your credit report it will show you whenever someone else has accessed your credit report.
The credit reporting body is required by law to include this on your credit report to help you protect your privacy. Don’t worry – only you will see this information and it is not shown to credit providers when you apply for a loan, and it won’t affect your credit score.
Your credit report doesn't include
Your credit report can only include things that are permitted by the law to be there. This means that the following types of things are not in your report:
- religious or philosophical beliefs
- health information
- genetic information
- racial or ethnic origins
- political opinions
- sexual orientation
- membership of professional associations or trade unions
- criminal record
About credit scores
Your credit report may be condensed by a credit reporting body or credit provider into a single number or ‘credit score’ which is used by a credit provider as an indicator of your credit health when assessing a loan application. Your credit score compares you to other borrowers and helps a credit provider decide who to lend to and how much to charge for interest – so it’s important to keep your credit score as high as you can.
Your credit score is calculated by either the credit reporting body or by the credit provider that you have applied to, using a formula that evaluates how well or badly you pay your bills, how much debt you carry and how all of that stacks up against other borrowers. In effect, it tells you in a single number (typically between 0-1000, or sometimes 0-1200) what your credit report says about your management of existing credit.
The great news is some credit score companies will send you your free credit score every month. A monthly credit score shows you if the actions you have been taking to improve your credit score are working or not! By keeping track of your credit score, you can be confident that your credit health is in good shape for when you need credit in the future.
Visit the following websites for your credit score:
Your credit report will probably be requested from a credit reporting body by a credit provider when you:
- Apply for a loan from a bank, credit union or finance company lender (e.g. a home loan, credit card, personal loan or an overdraft facility)
- Apply for a store card (e.g. when you buy a TV on interest free finance)
- Rent things like a TV, fridge or computer
- Apply for a car loan
- Buy a mobile phone on a mobile plan. But your credit report won’t be used if you’re on a prepaid plan
- Sign up for a phone, gas or electricity account
Different business will have different lending processes, so some might view your credit report as part of the application process, while others might not.
Lenders like banks, credit unions and finance companies, and phone, gas and electricity providers will almost always use your credit report when you take out a loan or sign-up with them. However, some smaller businesses may choose not to use your credit report when you borrow money or buy things on credit.
When you apply for a loan or sign up with a new business, it’s worth checking whether they’ll use your credit report. You should be told this at the time of making the application.
Your credit report can’t be used when you rent a house, apply for a job, or purchase or make a claim on general insurance or life insurance.
Checking your own credit report has no impact on your credit report or credit score when viewed by a credit provider.