Go figure: Credit scores for Australians improve

Visa and MasterCard credit cards generic

Australians are more creditworthy now than before the pandemic hit earlier this year. Who would have thought?

Believe it or not the average credit score of Australians at the leading credit agencies has improved since March this year despite widespread redundancies and business closures during the recession.

Leo Hillary, the managing director of credit score provider, CreditSavvy says: “On our numbers, we see the credit scores getting better through the past few months - we had an average score of 680 in the six months after March last year, this year the number for the same period is considerably higher at more than 700.”

The same picture emerges at credit agency Illion where the group has recorded improved credit scores across the board: Credit scores are a key criteria when assessing loans for all purposes from home mortgages to credit cards.

However, creditworthiness has improved not because Australians are suddenly richer.

The explanation is strongly linked to the government-led stimulus measures across the economy along with some useful paralysis at the bottom end of the market where payday lenders have not been as active as before.

Barrett Hasseldine, the head of analytics at Illion, suggests: “It is certainly counterintuitive in these circumstances to see credit scores getting better, but there are a number of explanations including the large number of mortgage deferrals in the banking system and a big drop in credit applications.”

Individual credit scores are marked down the more an individual applies for credit.

Hasseldine also points to the early super release program where 14 per cent of applicants have said they were using the withdrawn funds to pay down debt.

The Australian trend is being mirrored overseas, with new numbers in the US showing better credit worthiness since the pandemic began.

The widely used FICO credit score stood at 711 in July, up from 708 in April and 706 a year earlier, according to the Fair Isaac Corporation, the score’s creator.

Individual credit scores are calculated on three key factors: the amount of money you have borrowed, your payment record and the number of credit applications you make.

At Credit Savvy, Hillary also suggests that the strong figures in Australia are partly thanks to the gradual introduction of the Comprehensive Credit Reporting regime.

Commonwealth Bank, CreditSavvy and xI5ventures (the venture building arm of Commonwealth Bank) recently signed an agreement to allow Credit Savvy to offer its services directly to CommBank customers through the CommBank app.

According to Credit Savvy, 614,000 people checked their credit score between March and August 2020, a 36 per cent increase on the same period in 2019.

In his Trans-Tasman economic update this week, CBA CEO Matt Comyn cited the government income support and strong fiscal stimulus in creating a situation where “consumers have been ahead of what we would have been forecasting to the end of September”.

But for both banks and individuals currently working under extraordinary conditions where much of typical consumer activity is suspended or delayed, the big question is how long will creditworthiness improve in the face of a major economic crisis?

At Illion Hasseldine suggests: “I think the industry will find that next year as a lot of the stimulus programs and the mortgage deferral arrangements run off, the trend is unlikely to continue.”