When you apply for credit from a financial institution, or sign a contract that permits you to delay payment for goods or services, the organisation providing the credit wants to be confident you will pay back what you owe. Past behaviour is a strong predictor of future behaviour. So, if you’ve paid your bills and made your loan repayments in the past, the organisation will be reassured that you are likely to continue to do so in the future.
Credit reporting agencies (such as Equifax) keep track of whether you pay your bills and repay your debts, compiling this information into a credit report. When you apply for credit, the potential credit provider will typically review your Credit Report before deciding whether to extend credit to you. Depending on their lending criteria, the credit provider will place less or more weight on your Credit Report, but it usually has a significant impact on whether your credit application is approved or denied.
Credit reports encourage responsible lending. That is, they play an important role in ensuring credit is only provided to those who are likely to be able to repay it.
As a credit reporting body, Equifax is one of the leading custodians of Australians' credit information.
See below for two examples of how credit reporting can work in the real world
New credit application
Sue applies for a personal loan with ABC Bank by completing a form online. The form has terms and conditions advising Sue that a credit check will be conducted and that her information can be passed on to a credit reporting body.
When assessing Sue's application for credit, ABC Bank takes into account information on the form, any other information they may have (like if she is an existing customer), and also requests a credit check from Equifax (or another credit reporting body in Australia). As part of this check, some information from the application is passed on to Equifax, such as Sue's name, address, employment details and the credit enquiry information. In response, Equifax will supply ABC Bank with all or part of Sue’s Credit Report and, in most cases, her Credit Score as well.
ABC Bank then makes a decision based on all the information they have about Sue's application for credit. Each credit provider will make their own credit assessment decision. While legislation determines the information a credit reporting body can pass on to credit providers, credit providers decide how to use it and what analysis to apply. A credit provider can use a credit report as part of the information they review to help make a decision on whether to extend credit to you. They may also look at the information you include on your application form as well as any other information they may have on you as a customer, and include all this information when making a decision based on their own lending criteria. Therefore information from one lender may mean a loan application is rejected, whereas another will accept it.
Default listing
Sue also has a mobile phone contract with the telco ABC Phone Company, and she has missed a number of payments. Despite ABC Phone Company contacting her, she has not paid her outstanding bills.
The phone company decides to list a default for non-payment (this is outlined in the terms and conditions of her account), which is legal because the amount is in excess of $150. This payment default information is provided to Equifax and other credit reporting bodies.
Next time Sue applies for credit, any credit provider who conducts a credit check with Equifax, or another credit reporting body, will be able to see this default information on her Credit Report.
