With the launch in 2017 of Dun & Bradstreet’s Credit Simple product, personal credit scores have become a bit more mainstream. Indeed there will be now be a fair number of people in NZ who have at least viewed their credit score at some point even if they can’t quite remember what it was.
But what exactly is a credit score and how is it used when you apply for credit?
The main credit reporting companies in New Zealand, Equifax (previously Baycorp then Veda), Illion (formerly Dun & Bradstreet) and new kid on the block Centrix (started by Baycorp founder Keith McLaughlin) create a credit report on you the moment you apply for a credit account with a credit provider. This could be a bank account, a mobile phone, electricity account, car finance etc. Prior to 2012 these reports were known as “negative only” as the reports noted only negative events such as payment defaults, court judgements etc. Since 2012 positive events such as how you pay your credit card bill (current, 30 days late, 60 days late) can also appear. However, this depends upon whether your credit provider participates in the positive reporting regime, and to which agency they send their data.
But back to your report. When a credit provider performs a credit check on you they will typically order a report from one of the previously mentioned credit reporters. It is up to the credit provider how they use the information contained in the report. Traditionally a credit officer would review the report and make a judgement call on whether to extend credit and on what terms (i.e. if additional security is required). With only negative information to go on the credit officer would likely decline the application if there was adverse information – such as unpaid debt collection accounts or court judgements – but approve in the absence of negative data.
Some years ago the credit reporters started developing internal scoring models which aimed to utilise the information contained in a report and give it an overall score. The scores could then be used by a credit provider to give an objective view of the risk of extending an individual credit which could then be used when making a credit decision. Over time the way these scores have been developed has become quite sophisticated especially now that there is significantly more data to work with. Each credit reporting agency has their own proprietary algorithm for calculating credit scores but the intent is the same – to give higher credit risks lower scores and vice versa.
The advent of individual credit scores has also allowed for real-time high volume credit decisioning if required. This is possible because credit decisioning can now be based on a score rather than having a person review an individual report and come to a decision.
So, back to your credit score and how it is used. Currently your score could be used to automatically make a decision on a credit application that you make. This would depend to a certain extent to who you are applying for credit through – the larger the organisation (or the more credit applications they would be processing) the more likely this would be the case.
But the future is where the real benefits of a credit score lie. Here we may well see the US model of credit scores developing over time which would determine not only whether you get credit or not, but at what cost to you – the better your score the lower your interest rate.
The key take out here is get to know your credit score and once you know it try and improve it. The benefits may well flow to those that can do this.