Home loan: how to beat the banks with your credit score

If you don’t know your credit score then it’s time to find out what it is. It’s also worth knowing how credit scores work.

Average credit scores.

This week the banks hit the headlines again with Commonwealth Bank romping home with a record profit. As many analysts have pointed out, there are “headwinds” building for our very profitable banks. The most interesting of these headwinds is not credit quality or tougher regulation, it’s the coming explosion in personal credit score activity.

The empowerment of customers through the public availability of credit scores has long been promised in the credit market. Now through new services such as peer-to-peer lending and small loan services based on credit scores this empowerment is becoming a reality. CBA chief executive Ian Narev says he is both concerned and inspired by the changes taking place. Certainly, the banks are watching the sector closely with Westpac already haven taken a stake in early mover Society One.

If you don’t know your credit score then it’s time to find out what it is. It’s also worth knowing how credit scores actually work, because they are becoming a key tool inside the investment market. Paying all your bills on time is the obvious way to keep your credit score high, but it’s not the only way as I’ll explain later.

But first you need to know your score. It’s exceptionally easy to get a credit score. You can get it online — search for the term “my credit score” and a range of free services pop up.

You are scored out of 1000 and the point to remember is that the average Australian has a score of 649. (See table)

Looking more closely at the numbers you’ll find that if you are younger you will be expected to have a lower score and if older a higher score (yes, we get more ­responsible with time, here’s proof!).

To be precise, the 18-24 year old age group has an average credit score of 564, the 25-34 year olds have 610 and those over 55 have the highest average score at 735. (These figures come from Credit Savvy, which is owned by John Symond’s Aussie Home Loans, which is in turn controlled by Commonwealth Bank.)

Getting a good score is always going to be useful throughout any investor’s life, and this will be more important than ever in the months ahead as lenders get much more selective after the recent investor lending crackdown by ASIC — most major banks have already lifted investor rates.

Until very recently the ability to get scores was extremely restricted and expensive. In fact, personal scores were a closely guarded asset for banks and credit institutions. Indeed, for most people attempting to get a loan, the lender held all the cards. When you visited a bank or attempted to get a smaller loan over the phone, the lender had your credit score but you did not.

Now armed with this information you can see where you sit in the system. If you score more than 649 you are above average and that can be reflected in your loan arrangements. Similarly, if you score more than the relevant average score in your age range then you can use those numbers to get a better deal.

In common with most new innovations — for customers as ­opposed to credit suppliers — the major banks are the slowest to move here. Loan officers in the major banks may negotiate on the terms of a home loan if you put forward your credit score and make it clear you know your scores and prove you are a better prospect than the average customer.

But the most responsive sector is the flourishing peer-to-peer lenders such as SocietyOne, RateSetter, ThinCats and Marketlend. These lenders are using the public availability of credit scoring in two ways:

First, they are cherry-picking the customers who have above average scores — that is, more than 649.

Second, they are attracting investors who wish to get a better rate on cash than offered by the banks.

Now what most people don’t realise is that your credit score gets diluted not just if you have transgressions such as not paying bills. In fact, every single time you apply for a loan — whether you eventually take up the loan or not — it diminishes your credit score.

This very unfair scoring system dates from an earlier period when getting or applying for loans was a much more laborious affair involving physical attendance at bank branches. In those days people applied for very few loans. Now, using the internet, an investor could apply for five loans in an afternoon.

“The scoring system is unfair and really needs to be updated,” says Clayton Howes, the chief executive of MoneyMe, an online operator specialising in the provision of small loans for consumers. He says the credit score publicly available at present — with an average score of 649 for Australians — is a score diluted by activities such as multiple loan applications.

Howes is working on a new venture which will offer comprehensive scores that adjust for the variables now included. Ultimately that should mean a fairer ­system and, as Howes explains: “For the first time we will all get a better picture of Australian personal credit scores and not penalise consumers who are acting responsibly by shopping for the best deal.”

The pace at which this industry sector is moving is quite dramatic; one innovation follows another as a veritable land grab occurs across the sector not entirely dissimilar to the race which happened in our lending. As an investor make sure you are armed with the proper equipment the next time you are looking for a loan.

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