Your credit rating is a window into your financial life, and if you want to do almost anything relating to lending, you need to keep it clean!

There are a few credit ratings agencies in Australia, Equifax, Experian and Dun & Bradstreet (D&B also operate a collections agency/service). They keep records that are provided to them by financial services providers, and make these available to lending institutions.

Usually, a lender will consult your credit file as part of the loan assessment process, so that they can check on your “financial character” by checking up on what’s on your file.

The key things that are on your file are:

• Personal details

• Loan applications that you have made

• Current Credit Providers

• List of Directorships

• Loan Defaults both paid and unpaid

• Bankruptcies

It also has whatever residential and employment history has been made available to the ratings agency. Some lenders have now adopted a more detailed disclosure regime, so that they will relay to the ratings agency the status of your loans, credit cards etc – so even if your payments are late, that might show up.

Some also have a credit “rating”, which takes a bunch of factors into account to give you a score on a scale of 1 – 1200, or a rating from A to E.

These ratings are influenced by a range of factors, including the type and amount of credit you have applied for, and any black marks (arrears, defaults, bankruptcy) on your record.

You also need to be aware that things like mobile phone and power providers also access your credit record when you apply for a new phone or electricity contract, which is treated like a credit contract.

When it comes to protecting your good financial name, there are some things you need to do:

• Pay phone and electricity bills on time – this is one of the biggest causes for defaults being listed on people’s credit files;

• Don’t allow loans to go into arrears – this includes credit cards, store cards, personal loans and mortgages – the lot;

• Respond promptly to letters and phone calls from lenders – if you ignore them, the problem will NOT go away. They will work with you if you talk to them

Don’t stick your head in the sand.

A default on your credit file is a red flag to a potential lender, so keeping it squeaky clean is key to maintain your financial credibility. It stays on your credit file for 5 years even after it has been paid. I think that indicates how important it is to maintain a healthy credit file. A bad experience or mistake can lead to 3, 5, 7 years of restrictions on your ability to borrow.

The ramifications of a poor credit file are that many lenders will simply not lend to you.

For a young person looking to buy a home, or saving up to buy a home, traditional wisdom used to say that you would save your pennies with a bank and then go cap in hand to them to see if they will give you a loan. You be loyal to them - they’ll be loyal to you.

No. Not today – there is no loyalty in banking.

Similarly, given that around 60% of loans are written by mortgage brokers – that rationale is out the window. We don’t do our banking the way our parents used to, and banks don’t behave the same way any more either.

The things you can do to set yourself up well are to protect your credit file – pay things on time – and save money in an account you can’t get at with a card or your phone.

You don’t need to get a credit card or personal loan and pay it off to give yourself a credit rating. To be honest, credit cards are a real trap for young (and not so young) people who are smitten with the concept of instant gratification. If you have a mobile phone contract, you have something on your credit file. You don’t need to obtain credit to potentially buy stuff you can’t afford.

You can get hold of a copy of your credit file from Veda Advantage – there’s a free option which takes a little while to be sent out, or you can pay a subscription to receive an immediate copy or to have regular updates and alerts.

If you want to do this, go to www.mycreditfile.com.au where you can get more information.

I hope that’s helpful – hit me up with any questions!