Thursday 27 October 2016

Credit reports can have far-reaching consequences

Published 15/10/2015 | 02:30

Picture posed
Picture posed

Personal credit reports are a form of life-long assessment. They can determine where we live, where we work and, depending on what country students end up living in, the hospital they get treated in, the insurance company that will insure their car and the landlord that will say yes to their rental application.

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Yes, personal credit reports are that powerful and are set to become even more so, according to financial expert Frank Conway.

Once you turn 18 years of age, you can legally borrow money.

But with independence comes responsibility and when it comes to credit, there is always somebody watching how you behave and in the case of borrowing money, this is called a credit report.

A good way to explain personal credit reports is they are a form of social media for the financial services industry, according to Mr Conway, who is founder of - the financial literacy initiative - and editor of the Irish Financial Review.

Contained within a typical credit report is name, address, debts outstanding and so on.

In the old days, banks would go through this report in great detail but today, they increasingly use a much more sophisticated model called a credit score, which is a mathematical calculation of all your credit information, he explained.

An important development in this space is that Ireland will soon have a new Central Credit Register managed by an Italian-based company with a massive pedigree in predictive behaviour.

"In other words, whereas banks currently look at historical credit information, the new Central Credit Register will bring a capacity to predict how customers will behave in the future," Mr Conway said.

For example, while students over 18 can legally apply for a credit card, student loan or a car loan, whether or not they will be approved is a separate issue.

Capacity to repay a loan is only one factor as lenders will also factor in the "character" of the applicant.

A personal "relationship" with money is a major consideration and this is where a personal credit report comes into play.

Banks and credit unions will want to examine how you relate with money (i.e. if you have a previous borrowing history).

So, if you open a student loan or personal loan, the bank or credit union will report a number of personal facts about you to the credit reporting system, including:

● Your name;

● Your address;

● Your date of birth;

● Your phone number;

● The amount of the loan you were approved for;

● The date the loan was taken out; and

● The monthly repayments you are due to make.

These are some of the items that are reported about you, Mr Conway said.

After you take out a loan, each time you make a repayment, this is reported by the bank or credit union to the credit reporting system.

If you miss a payment, this is reported. If you default (fail to pay back), this will be reported.

Where the personal credit report system becomes very powerful is each time you apply for a loan or other forms of credit, you must give the lender permission to review your personal credit report.

If the lender notices a case where you missed repayments or defaulted in a past loan, it may result in your application being refused... and make it VERY difficult to borrow in future.

In some cases, if lenders notice you have too many loans already, they may refuse a loan application.

In some countries, a bad personal credit report can result in extra problems, such as:

● Employers refusing to give you a job;

● Landlords refusing to lease a property;

● Hospitals refusing admission; and

● Insurance companies refusing to grant cover.

Credit reports have become one of the most powerful stores of personal information. It is very important you protect it as having a poor personal credit report can have far-reaching consequences, Mr Conway said.

For students everywhere, before they formally enter the world of money for the first time (when they turn 18), it is vital they understand what lies ahead, especially on the consequences of what can happen when plans go awry. A bad credit report can end a lot of dreams!

The advent of the credit predictor

Across the globe, personal credit information is playing a growing role in how others assess how trustworthy we are when it comes to money matters. This trend is now taking hold here in Ireland with the shift to the new Central Credit Register.

Credit profiling might be a relatively new concept to the Irish lexicon but it is not new.

Credit profiling or credit prediction is the use of a mix of financial information that is then used to form an opinion on how a person can be expected to behave with credit in the future.

Banks and other credit providers used to simply look back on how borrowers repaid loans before they approved or denied a new loan application.

It was a very linear approach, Mr Conway explains.

Today, through some really sophisticated technologies and data analytics, large multi-national organisations 'feed' a range of account holder information into their systems to evaluate the propensity of that potential borrower ever defaulting.

They use a system called a credit score and it relies on a mix of the following to decide who can be trusted with borrowed money:

1.The payment history - the better you pay your bills, the better your credit score will be.

2.Debt amount or credit utilisation - if you are maxed out on credit cards all of the time, this rings alarm bells.

3.Length of credit history - the longer the better.

4.New credit - if you are applying for lots of loans recently, alarm bells will ring a warning.

5.Mix of credit - the greater the mix, the better and this really only comes with age (think mortgages, car loans, personal loans etc).

Irish Independent

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