COVID-19 and personal credit ratings

Given everything that’s going on in our COVID-19 world, maintaining a healthy credit rating might be the last thing on your mind.

But protecting your financial reputation by retaining a good credit score does matter. Bad credit ratings can affect your ability to get a mortgage, secure a car loan, even get a credit card.
 

What’s a credit rating?

A credit rating, sometimes also known as a credit score, basically summarises your reliability as borrower. Lenders—like banks, credit card companies, and car dealerships—use them as one factor to decide whether to offer you credit, like a loan or credit card.

Credit scores are calculated using information in your credit reports, including:

  • your payment history (whether you pay utility bills or credit card debt on time)
  • the amount of debt you have
  • the length of your credit history.

Good credit ratings versus weak credit ratings

In Australia, credit scores are usually calculated as a number between 0 - 1,200. A score towards the higher end is regarded as excellent, while a score towards the lower end is categorised as under average.1

Various credit reporting agencies have their own scoring models.

You’ll have a good credit record when you’ve been paying bills on time, your outstanding debts are regularly and routinely repaid, and you haven’t applied for too many loans with too many lenders.
 

What happens if you miss repayments because of COVID-19?

Many people have lost jobs because of COVID-19, while others are working shorter hours. The RBA says the official unemployment rate could hit 10% later this year.2 Financial stress is now a reality for many Australians.

However, just because we’ve had a once-in-a-century pandemic doesn’t mean banks, or service providers like phone and internet providers, stop recording missed payments. So many peoples’ credit scores are getting worse.

In other words, unless you’ve come to special arrangements with lenders and service providers, the system will act as normal. Often a missed repayment is the result of an oversight—an innocent mistake.

Temporary financial relief is possible

If you’re finding it difficult to pay bills and make repayments, you should know that banks, lenders, insurers, and other institutions are offering financial relief options for customers. But you need to get in contact with them so they can work out arrangements that take some pressure off you.

All banks have hardship programs where some of your debts may be waived or reduced, or mortgages deferred.

The Australian Banking Association (ABA) recently announced3 that during COVID-19, deferrals granted on home loans and other lines of credit won’t be reported as missed payments by banks, and credit ratings won’t be affected. To achieve this clean slate, customers will need to have met their repayment schedule prior to the virus outbreak in Australia.

People with insurance policies should also contact their insurer and discuss the possibility of deferring premiums.
 

Where to get extra help

If you’re suffering financial hardship because of COVID-19, it may help to talk to a financial counsellor who can provide guidance on how to manage your debts and finances. For free financial counselling, call 1800 007 007 or visit the National Debt Helpline.

The National Debt Helpline is a not-for-profit service that helps people tackle their debt problems. They are not a lender and don’t ‘sell’ anything or make money from you. Their professional financial counsellors offer a free, independent and confidential service.

If your matter is more complex, they can refer you to your closest face-to-face financial counselling service.

They can also put you in touch with other services you might require, such as legal services, crisis food and accommodation services, and health services.

1 Credit scores and credit reportshttps://moneysmart.gov.au/managing-debt/credit-scores-and-credit-reports. Accessed 23 July 2020.
2 https://www.abc.net.au/news/2020-08-06/new-zealand-coronavirus-labour-force-jobs-economy-vs-australia/12527776
3 A COVID-19 mortgage deferral won’t affect your credit rating. Australian Bankers Association. 6 April 2020. https://www.ausbanking.org.au/a-covid-19-mortgage-deferral-wont-affect-your-credit-rating/. Accessed 23 July 2020.

Important information and disclaimer

This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. The information in this article is current as at August 2020 and may be subject to change. The information in this article is general in nature and does not take into account your objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. An investment with NULIS is not a deposit with, or liability of, and is not guaranteed by NAB or other members of the NAB Group. Opinions constitute our judgement at the time of issue. In some cases information has been provided to us by third parties and while that information is believed to be accurate and reliable, its accuracy is not guaranteed in any way. Subject to terms implied by law and which cannot be excluded, neither NULIS nor any member of the NAB Group accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication. Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market.