My fake credit score
The credit rating industry is big business and the way they score us can make or break our financial future, even wreck our home ownership dreams. But when Anuja Nadkarni plugged in her details, which included no prior credit history, a free rating servic
‘‘Pay off your defaults no matter how small they are and always pay on time. Don’t ever have defaults with a bank, ever.’’ Hannah McQueen, right
‘‘When there is no credit history on you whatsoever, the credit scores tend to look at where you live and your age. It’s a geographic risk index.’’ David Scognamiglio
Credit bureaus run an enormous national credit surveillance system by compiling credit files on all New Zealand adults from information provided to them by the likes of banks, insurers, finance companies and power companies.
Two colleagues and myself, all in our mid 20s, checked our credit ratings through the free service Credit Simple.
One colleague, 25, renting and who had paid off her student loan, had never defaulted on bills, but had the lowest score.
The other colleague, 26, renting, still paying off his student loan and who had also never defaulted on payments, had the highest score.
I, 24, living at home, paying off my student loan, never having defaulted on payments, sat somewhere in the middle.
Although we all sat in the ‘‘good’’ range, I was perplexed at how Credit Simple had given two of us scores based on little to no information. Essentially, fake ratings.
But how meaningful is a credit score that has virtually no information on you?
Credit Simple chief executive David Scognamiglio said they’re ‘‘pretty meaningful’’ because credit ratings or scores could be the defining factor in determining whether or not someone could buy a house or start a business.
‘‘When there is no credit history on you whatsoever, the credit scores tend to look at where you live and your age,’’ Scognamiglio said. ‘‘It’s a geographic risk index.’’
Pushpa Wood, director of the Westpac-Massey Fin-Ed Centre, said why I was given a score despite having minimal information was the ‘‘million-dollar question’’.
‘‘I’m still puzzled at how they’ve churned out a credit score with such little information on you. It’s not a credit rating, it’s simply a credit average. They’re looking at your age group, gender based on averages,’’ Wood said.
‘‘That is an average rating, rather than an accurate rating.’’
Wood, a finance expert who has been talking, researching and writing about money for three decades, said she had checked her credit score only once in her life, while applying for a job.
‘‘In my time, credit ratings weren’t that popular, now of course, everybody who’s going to lend you money is going to want to know what your rating is.’’
Wood said banks shared their information with mainly three credit bureaus: Illion (which owns Credit Simple), Centrix or Equifax.
I also checked my score with Centrix. According to them my score out of 1000 was ‘fair’ but not quite ‘good’ as Credit Simple showed.
My Centrix report had more information than my Credit Simple report, even though it was still slim and three years old – when I opened an overdraft account and applied for a credit card, both of which I had for only six months while I studied abroad.
It also had my work credit card listed on there — though the company said it was information the bank had passed on for an identification check and wouldn’t affect my score.
Centrix chief operations officer Mark Rowley said the company did not provide a credit report if it did not have enough information.
‘‘If we don’t have enough data to score, we won’t provide one, because it’s meaningless,’’ Rowley said.
So why give me a credit score at all?
‘‘Scores allocated to thin files show how other people with thin files eventually perform, financial institutions use that information to rule you out,’’ Scognamiglio said.
‘‘It tells a story, if not a bigger story. If you have a thin file financial companies might rely on other data, so it’s certainly not pointless.’’
That other data could be your daily bank transactions, what you spend your money on and how.
‘‘The banks sum up all your spending by putting them in categories like entertainment and gambling, for example. They look at your spending behaviour and based on that, judge whether you can afford a loan,’’ Scognamiglio said.
Credit Simple is creating its own version of what banks use to help people categorise their customers’ spending to give people a better picture of whether or not they could get a loan.
Scognamiglio claimed credit rating reports were becoming more accurate as more data flowed into them.
What makes up a credit rating?
Financial adviser Hannah McQueen said credit scores were generally determined by five factors: your payment history, your debts, the length of previous loans, types of loans and if you’ve got new credit.
Banks, insurers and a whole heap of other businesses including buy now, pay later companies, Vodafone and Spark feed information to the big credit reporting bureaus Illion, Centrix and Equifax.
When customers sign up with a electricity or phone provider they agree to allow their information to be passed on to credit agencies, stated in the fine print and privacy policies.
McQueen said everyone from banks, finance companies, utility companies to landlords and employers check credit scores deciding whether to issue a loan or a mobile phone contract, or hire a job applicant.
However, student loans, unless you’ve defaulted on payments, do not affect your credit score.
Good news if, like me, you’re knee-deep in paying it off, bad news if you’re like my colleague who would have welcomed a credit boost for having paid off her student loan by the age of 25.
Until a recent change to the Credit Reporting Privacy Code, people who did as little as inquire about a loan would have a black mark on their credit record.
However, from October 1, a credit check would be recorded on the customer’s credit file only if they went on to take out a loan.
Recording all credit inquiries on credit files meant consumers shopping around for good loan rates presented similarly to people searching desperately for credit to fend off insolvency.
The change to the code followed an attempt in 2011 by the Office of the Privacy Commissioner to get lenders to voluntarily stop reporting when people sought quotes which did not lead to loans being taken out.
When the commissioner checked last year, the vast majority of lenders were still reporting people who sought quotes, but did not go on to borrow.
Debt spiral
The Reserve Bank’s Financial Stability Report from May showed household debt was growing at 6 per cent a year, compared to 9 per cent in 2016. And debt was still increasing faster than income.
About two-thirds of households have no mortgage debt, but nearly 40 per cent of new mortgages are to people borrowing more than five times their annual incomes.
North Shore Budgeting Service adviser in Auckland Sue Deason said the average debt of people who saw her was between $20,000 and $45,000 – and that was not including mortgages.
With mortgages people owed about $1.5 million, Deason said.
‘‘In the North Shore we have less people coming in with payday lending loans than, say, South Auckland,’’ she said.
‘‘However compared to 10 years ago we’re getting more people paying off payday lending loans because they’re so easily accessible online – and the poor have gotten poorer.
‘‘They might be on a high salary but are caught up in a debt spiral, because every time they owe money they have to go borrow from someone else and then are owing interest on that.
‘‘The debt spiral is very real.’’
How to improve your credit score
Ignoring the debt mountain would only exacerbate the problem, hence Deason said bad credit scores could be a blessing in disguise for the heavily indebted, saving them from getting into further debt.
Deason said she had recommended the no asset procedure – a once in a lifetime opportunity to have all debts written off – as a way to ease the load.
To qualify for a no asset procedure, the applicant must be able to prove they have no realisable assets or any way of paying back their debts and have no former bankruptcy.
The names of those who take the no asset procedure route are published on the insolvency service’s website and stay there for four years.
It’s not a completely clean slate though, as no asset procedures affect credit ratings and limit future prospects of a loan or even a job.
Wood said the easiest way to build a credit profile was by setting up automatic payments to credit cards online.
But she advises to make credit card repayments in full rather than just repaying incrementally, as interest could add up.
McQueen said consistent payments over time would slowly improve the credit score.
‘‘Pay off your defaults no matter how small they are and always pay on time. Don’t ever have defaults with a bank, ever.’’