Wednesday 24 January 2018

The power of credit reports

Picture posed
Picture posed
Charlie Weston

Charlie Weston

THIS year is set to be a big one in the personal finance reporting space.

A new personal credit reporting system will be phased in as a replacement for the current Irish Credit Bureau (ICB).

For anybody that has ever applied for a mortgage, car loan, personal loan, credit card and most forms of other personal credit, they will have a familiarity with how banks use personal credit information.

Until now, banks, credit unions and local authorities use the ICB database to evaluate the "credit-worthiness" of those who apply for credit, according to the founder of the Irish Financial Review website, Frank Conway.

He said the same institutions report back to the ICB on how those loans are repaid.

"But this 'linear' credit reporting system is about to change radically.

"This is because a replacement to the credit reporting system currently managed under the ICB will become the responsibility of the new Central Credit Register, which the Irish Central Bank awarded the management of to an Italian-based firm called CRIFF."

Mr Conway said the firm was a giant in credit reporting across Europe.

Under the Central Credit Register, in addition to all of the same data the ICB collects and reports on each of us, a new dimension will be added - it's called a credit score.

Mr Conway said: "CRIFF is really smart at analysing customer information and using it to make predictions about our future relationship with money.

"This is very different to how the ICB currently operates, which is largely based on reporting past behaviours."

Under CRIFF and the new CCR, a lot more of how we deal with credit will be analysed to form a more holistic picture of our "credit risk".

This system is widely used across the US and UK.

Mr Conway said that if someone is beginning to max out on their credit card, it would trigger an alert for a higher risk than someone that repays their credit card bill in full each month.

He said credit scores matter for lots of reasons. Personal credit reports are a form of life-long assessment that can determine where we live, where we work, the hospital we get treated in, the insurance company that will insure our car and the landlord that will say yes to our rental application.

"Yes, personal credit reports are that powerful and are set to become even more so," he said.

But he said we are not about to turn into the land of Big Brother in the credit scoring space, at least not yet.

"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 where you applied permission to review your personal credit report," he said.

If they notice 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.

All of this information, not just how you repay, but the number of times you make an application, where you apply, how much you applied for and were approved for will be tracked much closer in future.

This is how the concept of credit scoring is built up on a case-by-case basis, Mr Conway said.

"Credit reports have become one of the most powerful stores of personal information.

"It is very important that you protect it as having a poor personal credit report can have far-reaching consequences in loans, employment and even insurance."

Mr Conway said that a good way to think of credit reporting and credit scores is that they have become your most powerful profile.

A good credit score can open up lots of options but a bad one can stop you in your tracks.

He said: "And we are not just talking about credit. Think renting. Think jobs. And perhaps even think insurance."

Because we are entering a more dynamic credit reporting space, Mr Conway said, now is the best time to plan for tomorrow.

How your score is calculated

CREDIT scoring relies on a mix of the following to decide who can be trusted with borrowed money:

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

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

* Length of credit history - the longer the better

* New credit - if you are applying for lots on loans recently, alarm bells will ring a warning

* 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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