If people need access to money – and quickly – there are a number of options. Whilst many people may not be able to walk in to a bank and withdraw from their savings, they could use their credit card, extend their mortgage or take out a personal loan to cover that unexpected expense. But what about the over 3.47 million Australians (Veda Advantage – 2009) who are living with a negative listing on their credit file – also known as a ‘bad credit rating’?
When times get tough, many of these people are left with very few choices. Negative listings are recorded on a person’s credit file for between 5 and 7 years, depending on the type of listing. How many people would NOT have surprise expenses during that period? Not many.
People with adverse listings can be the lepers of the finance world. Particularly those people with a significant number of negative listings on their credit file. No one wants to touch them. No one that is, except for those ‘informal’ finance companies such as pay-day lenders and pawnbrokers.
Last Friday, the Sydney Morning Herald ran a story titled ‘Finding favour on the fringes’ in which Bina Brown writes of the fine line between meeting a legitimate market demand and preying on desperate people. The SMH reports that 500,000 people a year access $800 million in short-term credit facilities. Pay-day loans are typically considered to be loans taken for less than $500 for two to four weeks.
The article quotes a report ‘Measuring Financial Exclusion in Australia’ prepared by the Centre for Social Impact (sponsored by NAB). The Centre looked in to the growing demand for this ‘fringe’ credit market, and the rapidly expanding network of companies willing to supply it.
The report says “Financial exclusion exists where individuals lack access to appropriate and affordable financial services and products – the key services and products are a transaction account, general insurance and a moderate amount of credit.”
How the fringe credit market works
“Lender fees vary, but $25 to $30 per $100 advanced would be typical. A loan of $1000 for three months might attract a fee of about $450, or ultimately $111 a week for 13 weeks in scheduled repayments.
While many consumer groups are against this type of lending since it is often vulnerable people who access the loans, industry proponents argue anyone can find themselves short of cash and short-term credit can make a considerable difference to people’s lives.
Both sides admit there are rogue players in the industry, such as those who charge an upfront fee of $30 on a $100 loan plus the interest rate which is capped at 48 per cent a year.
They then set a two-week period to repay the loan (which the broader industry believes to be too short a time period).
If the loan can’t be repaid after two weeks or the next pay date, they charge another $30 and give them another two weeks and so on. If the client defaults on the loan they charge $75.” SMH reports.
Reforms to legislation
Under the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 before Federal Parliament the most a person borrowing $100 can be charged is $100, although this would exclude any default fees.
The proposed reforms have also included a cap on the upfront fee that can be charged on small amount loans (loans for $2000 or less for less than two years) of 10 per cent of the loan amount, plus an interest rate of 2 per cent a month. A parliamentary committee reviewing the legislation is due to report by November 14.
These reforms would be welcomed, to ensure that those people who don’t have access to standard credit are not digging an even bigger hole for themselves by being forced to pay exorbitant fees and interest charges when they are obviously in desperate need of a break.
If not fringe credit, then what are the options for those who are financially excluded due to a bad credit rating?
Well, it depends on what a person’s credit file reads like. If the person has entered into a debt agreement or bankruptcy – the options are unfortunately limited, access to these types of loans may be necessary. An alternative could also be found in Government assistance.
In many other cases, there may be no need for people to be disadvantaged in this way by a bad credit rating. Particularly if their credit file shows defaults, writs or Judgments which they believe are inaccurate, unjust or just should not be there.
Credit repair allows the consumer to have the black mark/s completely removed from their credit rating. This gives them the lending options that they would have had prior to the blemishes on their credit file.
So, they can borrow at a lower interest rate with the lender of their choice (provided they meet all other criteria of course). This can potentially save them thousands of dollars in interest alone.
Credit repair is the best solution for those potentially hundreds of thousands of Australians who may be living with a bad credit rating and who are completely capable of repaying a loan. It was bad luck or creditor error that instigated the adverse listing in the first place.
Many people are victims of simple and sometimes complicated errors with billing procedures from creditors, are victims of identity theft, have had joint lending situations go wrong (such as divorce, guarantors etc) or have had the default listed incorrectly. Despite all of these very fair complaints many consumers have been unable to settle the account themselves with the creditor and unable to remove the offending default, writ or Judgment from their credit file.
How likely would it be that a credit file would contain errors?
It is astounding how common credit file errors may be, considering the debilitating effects for the credit file holder once they have a negative listing on their file.
The possible volume of errors on Australian credit files was exposed by a small scale study conducted in 2004 by the Australian Consumer Association (now Choice Magazine). It revealed about 30% of credit files were likely to contain errors.
“In our view, there are serious, systematic flaws which are leaving an increasing number of Australian consumers vulnerable to defamation, mis-matching and harassment,” the ACA report said.
Transferring those figures from the Choice study to the number of credit files in Australia today, could mean potentially 4 million errors currently exist on credit files in Australia.
Recently Channel 7’s Today Tonight interviewed Veda Advantage’s Head of External Relations, Chris Gration on the possible number of errors on credit reports. He admitted errors within their system alone amounted to 1%.
“We give out about 250,000 credit reports to consumers every year. But only in 1 per cent of cases is there a material error on the file, so a default or an enquiry that’s incorrect,” Mr Gration told Today Tonight.
Even if as little as 1 per cent of those 14 million credit files contained errors, that would still currently leave 140,000 credit files in Australia containing errors that just shouldn’t be there.
So rather than allowing their credit file to continue to plague them, navigating the world of ‘bad credit history’ finance, or the ‘fringe credit market’ which can sometimes leave them with more problems than when they started, people should be educated on the possibility that their good name can be restored.
So if people know anyone, or are in the situation themselves where they do have a bad credit rating which shouldn’t be there – it could be good advice to get them to seek out a reputable credit repairer to review their credit file and help them back to financial freedom.