One of Australia’s largest credit reporting bureaus has launched a new scoring model and there’s a fair chance it will affect your credit rating.
Don’t let that freak you out. The new generation credit score by Equifax is actually designed to provide a more accurate view of your financial standing. Think of it as an app update – it’s the same product but with new and improved attributes.
The way that Australians spend money has changed – particularly with the rise of alternative credit providers including Buy Now Pay LaterBNPL and payday loans, along with more history of consumer repayment information than ever before. So, it makes sense that the way our creditworthiness is assessed evolves along with it.
What is an Equifax Credit Score?
It is a summary of an individual's credit information held by Equifax, one of Australia's major credit bureaus. The new generation scoring model aims to provide a more robust assessment of your credit history. It uses the information in your credit report to predict how likely you are to pay back a loan or mortgage. This helps lenders to tailor their offerings in line with your credit rating.
Does Buy Now Pay LaterBNPL affect my credit score?
It might now. Previously, credit bureaus did not take into account BNPL services when producing credit reports. Equifax Credit Scores now draw on "alternative data sources" to assess your creditworthiness. These alternatives include some BNPL providers, payday lenders, internet and phone providers and debt collection agencies.
The BNPL sector is off to a slow start when it comes to sharing information with Australia’s credit bureaus. However, as time goes on, we’re likely to see greater transparency. So, paying your instalments on time will be more important than ever.
How does my credit score affect my borrowing capacity?
Your credit score is essentially a prediction of how likely you are to pay back a loan. The higher your credit score, the higher your chances of accessing larger amounts of credit and potentially unlocking lower interest rates. Unfortunately, when your credit score is lower, you might be seen as more of a risk because your credit history suggests you may have trouble paying back a loan.
Why do lenders need so much data?
When you lend money to a mate, you run the risk of never seeing that money again. You’re okay with it because it’s only $20 or so. But for lenders, the stakes are much higher. They want to be pretty darn sure that they’re making the right decision.
When assessing an application for credit, lenders don’t just look at your existing debts and your credit score. They look at your overall affordability position – what you’re spending your money on and how much you have leftover to pay for a loan. This plays a huge role in facilitating responsible lending. You might be credit card free and up-to-date on your mortgage repayments, but if you’re drowning in Afterpay debt, it wouldn’t be safe to offer you a loan you can’t afford.
How does Equifax's Credit Score ‘predict’ my creditworthiness?
This is where things start to get technical. The new scoring model is powered by a highly sophisticated algorithm that attempts to predict an applicant's ability to service a loan. This allows lenders to more appropriately match credit products such as personal loans and mortgages with your risk level.
Will my credit score change because of the new scoring system?
The truth? It depends. If you have a stellar reputation with credit providers, you might even see your score go up. For many, it will remain about the same. But in some cases, it may drop as it shows a more accurate reflection of your credit worthiness.
Want to know if your scores have changed? You can check them here.
Disclaimer: This article contains general information only, and is not general advice or personal advice. Wisr Services does not recommend any product or service discussed in this article. You must get your own financial, taxation, or legal advice, and understand any risks before considering whether a product or service discussed in this article may be appropriate for you. We have taken reasonable efforts to ensure that the information is accurate at the time of publishing, but the information is subject to change. We may not update the article to reflect any change.