Whether you are new to the site or a regular reader, if you have had any interest in frequent flyer programs before you may have realised that earning points from credit cards – either from a signup bonus as a new customer, or from ongoing spend – are a key way that points are earned by the general public.
Point Hacks has been promoting a range of frequent flyer credit card offers for some time – but we haven’t yet covered in any detail some of the considerations around how banks assess your credit-worthiness to allow you to use points-earning accounts.
In a new series of guides we aim to explain how the Australian credit system works, and we have worked with some of the experts at MoneyPlace who have years of experience at major banks.
- The credit card assessment process
- How loans and credit card applications could impact credit scores
- The upcoming changes in the credit reporting system
- Managing your credit – our key tips
Disclaimer: This guide was written by Paul Abbey, Chief Risk Officer of MoneyPlace. Money Place AFSL Ltd holds Australian Credit Licence number 466327. No commercial consideration has been given between Point Hacks and MoneyPlace for the inclusion of this content on the Point Hacks website.
MoneyPlace is changing the way Australians borrow by creating an online personal loans marketplace. It’s like what Airbnb is to hotels, but with loans. Investors make money available in their marketplace, and they find credit-worthy borrowers to lend to.
The Credit Card Assessment Process
When applying for a credit card, there are a whole host of factors that will influence the assessment process and the eventual outcome.
Credit providers – like banks – look at the three C’s when they receive an application to help them make a decision – Character, Capacity, and Collateral.
- Character – This is key for credit providers, and can even influence the interest rate the customer is charged. The main question trying to be answered is, do we think this customer will repay the loan or balance on a credit card?
- Capacity – Credit providers have a commitment to regulators to ensure responsible lending. They need to prove that the customer afford the new credit without putting them into difficulty. Approving credit for someone that cannot afford it, is not in the interests of anyone
- Collateral – This won’t factor into unsecured debt, like credit cards, but a credit provider may assess what security the customer can provide. This could be a house, vehicle, cash or other assets.
What happens after I apply for a loan or credit card?
All credit providers will have a different process, but the main steps that they take are:
- Assessment. They will assess the information provided, how much the customer earns, where they live, where they work, what assets & liabilities they have. If the customer is applying to a credit provider that they already have a relationship with, they may not need to provide as many details here.
- Credit Check. The credit provider will then pull a credit file from one (or more) of the Credit Reporting Bodies (CRBs) in Australia who are Veda, Dun & Bradstreet and Experian.
This file is an important piece of the puzzle. It details- Credit applications the customer has made over the last 5 years,
- If they have defaulted (not repaid for at least consecutive 60 days) on any credit obligations
- Detail public record information (bankruptcy, court judgements).
A common misconception is the CRBs hold a “blacklist”. This isn’t the case. It is simply a record of what has happened with your credit file over time. Each credit provider has different rules for what they will accept or decline in a credit file.
- Decision. Credit providers then merge the information provided through the application with the credit file data and any data the credit provider already holds on the customer, to accept or decline the application.
Out of these steps the key is the character assessment that usually happens through application scoring.
What is Application Scoring?
Application scoring (aka credit scoring) is a statistical model approach used by credit providers to quickly assign a risk level to customers.
This score will help a credit provider to understand if they want to approve or reject the application. If a customer is approved the application score will still influence other factors, such as credit limit for a credit card or interest rate for a personal loan.
Application scoring is different for all credit providers and will differ by lending product (credit cards, personal loans etc..). Although similar approaches are taken to build the application scoring by credit providers, no two scorecards are the same.
A hypothetical scorecard for an imaginary customer:
| Characteristic | Score | |
|---|---|---|
| Number of Enquiries last 12 Months | 0 enquiries | +30 |
| 1-2 enquiries | +20 | |
| 3-6 enquiries | -5 | |
| 7+ enquiries | -15 | |
| Number of Unpaid Defaults | 0 unpaid defaults | +5 |
| 1 unpaid default | -50 | |
| 2+ unpaid defaults | -150 | |
| Time Since Last Personal Loan Enquiry | 0-7 days | -20 |
| 8-30 days | -15 | |
| 31-365 days | +10 | |
| 366+ days | +50 |
Scorecards work by taking all the data that can be gathered by the credit provider and allocating points based on each piece of information.
What can’t the credit provider use?
Credit providers are not permitted to use any factors that would be deemed to be discriminatory – e.g. age, gender, race, religion – in their assessment.
What about Capacity?
It is important for credit providers to ensure they are lending in a responsible way. They basically ask themselves can the customer can afford the new credit facility? Do they have enough income each month to cover all their rent/mortgage, living expenses and existing loans? Should they reduce some credit card limits or close them altogether?
These will be factors the credit provider will look at. Some examples might include:
- If a customer has credit card limits totalling $85k that they’re wanting to keep, this will need to be factored into a credit assessment
- The credit provider will factor in the minimum monthly repayments for the fully utilised credit limit (e.g. $85k outstanding balance) which could be as much as $2,550 per month allocated to credit card repayments
- Even if the credit card is paid out in full every month the credit provider will likely take the scenario in which is the credit card is maxed out and the customer is making minimum repayments
- A customer can be a low risk from a character assessment, but if they cannot afford the new credit facility the credit provider won’t be able to approve them
How long does all of this take?
Once an application is submitted, most credit providers will give you a response in under 60 seconds for a credit card or personal loan. The application may be referred by the decision system to a person for review to decide whether it will be accepted or rejected.
Once accepted, identity or income verification steps may add some time to the process. Some credit providers (like MoneyPlace) allow customers to connect their bank accounts up to their application which typically means the customer doesn’t have to send in payslips.
Coming next: How loans and credit card applications could impact credit scores
How Credit Works Series
- Part 1: The credit card assessment process
- Part 2: How loans and credit card applications could impact credit scores
- Part 3: The upcoming changes in the credit reporting system
- Part 4: Managing your credit – our key tips
Can we also approach this from the opposite perspective? I’d like to RANK credit providers in terms of their ease of application, professionalism of assessment and timeliness of promised rewards. Over the past few years I have applied with all of them, and experienced the full range of GREAT to ‘this mob is wasting my time’. e.g. My recent experience with ANZ found they seemed to have off shored their assessors. Staff struggled with broken audio, emails were not replied to, even pointless postal mail was sent weeks after. I was shocked I had to explain the difference between a tenant and landlord to the assessor. My hope is this will encourage credit providers in Australia to provide service to us. This is a lucrative business and we are exactly the target market they need to impress.
Hi Paul,
Is there any information on what sort of credit score the companies will consider unsatisfactory? I have been playing the points game over the last few years. I have a few cards left to tick off before cycling back to AMEX but I don’t want to be knocked back and have that on my record for two years.
Am I better off waiting a little longer until my last application is off my record? I know Citi is pretty tough on the subject, but are any other banks?
Thanks in advance!
General Advice Warning: This information may be regarded as general advice. Your personal objectives, needs or financial situations were not taken into account when preparing this information.
You should consider the appropriateness of any general advice provided, having regard to your own objectives, financial situation and needs before acting on it.
Hi there Jack,
Thanks for the question – unfortunately there isn’t any public guidance over what score a credit provider will deem unsatisfactory. The hurdles will be down to the credit providers specific risk appetite levels – e.g. bank A may take on more risk than bank B.
Remember that all credit applications will remain on your credit file held by the Credit Reporting Bodies for 5 years, not just 2 years – and that information about whether the credit application was approved or declined is not explicitly recorded at the CRBs under legislation today.
A good way to gauge would be to sign up with the free consumer/marketing arms of the CRBs:
– Credit Savvy, Experian
– Credit Simple, D&B
– Get My Credit Score, Equifax (was Veda)
They will typically show you possible offers from credit providers, where you are likely to meet their lending criteria, but they aren’t guaranteed offers…
thanks,
paul
Hi Paul
I recently returned to Sydney after living in the UK for 10 years. I have been back for about 5 months and secured a full time job soon after arriving. I have a credit card from before I went overseas but no other debt. I was wanting to pick up a Qantas FF card but have been declined. Would this be likely to me only being in my job for 3/4 months? When would you recommend I apply again?
Thanks
Lucile
Hi Paul,
My situation was that i was an employee earlier in the year, then in March became a sole trader. As an employee i was wage, easily exceeding say the $75000 pa criteria for several cards. Since becoming a sole trader my income had has increased. I applied for two personal credit cards about a month apart in july this year. They were knocked back despite meeting requirements. When i got onto the bank they basically said that as a sole trader i needed at least 2 yrs tax return history before they would even look at me. So i could have applied when i earned less but was more ‘secure’ as an employee. Looks like they didn’t actually look at my credit history.
So, any tips for sole traders who haven’t yet built their tax history as sole traders?
General Advice Warning: This information may be regarded as general advice. Your personal objectives, needs or financial situations were not taken into account when preparing this information.
You should consider the appropriateness of any general advice provided, having regard to your own objectives, financial situation and needs before acting on it.
Hi there mickt,
Thanks for the question – yes, unfortunately this is a common problem for people starting a new business, with most banks requiring 2 years of financials for the business, or tax returns. Ultimately it’s all about looking for stability, particularly for income to ensure people can maintain repayments without undue stress.
There are a number of new credit providers who specialise in lending for businesses who take a different approach to lending, but in the credit card space it is pretty limited.
thanks,
paul
Great article Paul and thanks for sharing the info. I would be keen to understand if positive credit behaviour such as timely repayments reflect on ones credit score. It seems that the credit scoring system in its current format primarily records negative behaviour with little if any options to improve ones credit score other than by not applying for or enquiring about products. Late last year I cancelled my credit card with a 12k limit for another credit card with the same bank with a lower limit of 6k in order to take up a sign up bonus. Since the card with a 6k limit was a new product, another credit enquiry was conducted? Didn’t make sense to me considering I was effectively lowering my overall credit exposure. For someone keen on only having one credit card at a time in order to maximise sign up bonuses what do you suggest in terms of frequency of credit applications? I don’t have any personal or home loans and generally pay my outstanding credit card balance in full each month. I rarely travel for business so the sign up bonuses are my best bet in terms of points accumulation.
General Advice Warning: This information may be regarded as general advice. Your personal objectives, needs or financial situations were not taken into account when preparing this information.
You should consider the appropriateness of any general advice provided, having regard to your own objectives, financial situation and needs before acting on it.
Hey there Shara,
Thank you for the question and feedback too, hope it’s been helpful!
Take a look at the follow-up articles, as I think they will help – in regards the swapping from one card to another with the same bank, the best way to check is to grab a copy of your credit file from the Credit Reporting Bodies (CRBs), part 4 has more on how to do this. That will confirm if another enquiry was made.
It is highly likely another enquiry was made, which I agree is counter-intuitive when you reduced the exposure!
Unfortunately, only a few credit providers are contributing repayment history information on a monthly basis to the CRBs which will impact credit scores.
thanks,
paul
Hi, if your credit score isn’t great, but you pay off your credit card in full, what will increase your score faster, closing the credit card account completely, or keeping it open and making a small purchase each month and paying it off straight away? And if you choose the best option, how long will it take for your credit score to get back up? Thanks
General Advice Warning: This information may be regarded as general advice. Your personal objectives, needs or financial situations were not taken into account when preparing this information.
You should consider the appropriateness of any general advice provided, having regard to your own objectives, financial situation and needs before acting on it.
Hi there Laura,
Thank for the question – and it is a tricky one! As ever, it depends on your specific circumstances – generally speaking, demonstrating a good repayment history is really important.
As for how long will it take, again it depends – ultimately with scorecards, they use around 10-15 different things to calculate the score. It is the combination of all these that generate the score, so trying to focus on just one thing may not help too much.
Take a look at part 3 which outlines changes to credit reporting – only very few credit providers are sharing repayment history information today.
thanks,
paul
Thanks for the post Paul. I recently applied for a high-end credit card and was rejected in my application due to my credit file. How much does the frequency of credit applications factor into credit card applications? The reason I say this is in the last 5 years (up to 2016) I have 1 mortgage (350k) and 1 car loan (20k) on my file, yet in 2016 I have 4 enquiries – 2 separate mortgage applications (march and april due to refinancing mortgages) and a 2x credit card applications in 1 month (after catching the point hacks bug, 1 is the amex). No defaults, bankruptcies etc.
I do however have a lot of file access requests on my file due to being a member of Veda’s identity watch – does this play a factor into any credit applications?
Thanks
AH
General Advice Warning: This information may be regarded as general advice. Your personal objectives, needs or financial situations were not taken into account when preparing this information.
You should consider the appropriateness of any general advice provided, having regard to your own objectives, financial situation and needs before acting on it.
Hi there AH,
Thanks for the questions – hopefully the follow-up articles have helped to shed some light on this for you.
Don’t worry about the the file access requests – only you and the Credit Reporting Body can see them, Credit Providers you apply to cannot see them. It is just a record that someone has looked at your file, but not left a footprint/enquiry on it.
thanks,
paul
I heard that it is undesired to apply for a lot of credit cards and cancel them later (for the sole purpose of obtaining signup bonus points). People say that this action will lower your credit score as one factor to compute the score is the ratio of your actually used credit over your allowed credit limit. Not sure if it is true in Australia.
Thanks in advance for answering.
General Advice Warning: This information may be regarded as general advice. Your personal objectives, needs or financial situations were not taken into account when preparing this information.
You should consider the appropriateness of any general advice provided, having regard to your own objectives, financial situation and needs before acting on it.
Hi there Skyline,
Thanks for the question – parts 2 & 3 of the series should help to answer this. The key aspect to remember is that the the ‘negative’ credit reporting system (which most credit providers subscribe to) only details limited amounts of information – critically applications for credit and defaults.
Even with all credit providers sharing data under a positive regime, the utilisation metric you mentioned (balance / credit limit) won’t be possible – balance information is not currently allowed to be shared.
thanks,
paul
I’m interested to know how much the application score/credit check is weighted versus the consideration of your assets/liabilities – any advice on that front?
General Advice Warning: This information may be regarded as general advice. Your personal objectives, needs or financial situations were not taken into account when preparing this information.
You should consider the appropriateness of any general advice provided, having regard to your own objectives, financial situation and needs before acting on it.
Hi there Ryan,
Thanks for the question, but you might not like the answer – it depends.
It will all hinges on the type of product being applied for (e.g. mortgage, credit card) as well as how the specific credit provider has built their scorecards and strategies. Sorry!
thanks,
paul
So missing a payment only becomes a black mark after 60 days? I recall missing a payment on my BOQ credit card by 24hrs (it was paid in full the following day, and otherwise I’ve always paid statements in full when they were due) and I’ve always feared that this will tarnish my record. I’m keen to see your next article as I fear I sign up for too many cards chasing the sign-up bonuses! (I’m keen to get a QF F award next year).
General Advice Warning: This information may be regarded as general advice. Your personal objectives, needs or financial situations were not taken into account when preparing this information.
You should consider the appropriateness of any general advice provided, having regard to your own objectives, financial situation and needs before acting on it.
Hi there Paul.
In regards a default being lodged at the Credit Reporting Bodies, this is unlikely to happen before this point – there are a number of formal notices that must be issued to borrowers in arrears before this can occur – however, credit providers that subscribe to positive credit reporting will report repayment statuses each month.
Being 24 hours late won’t cause any problems – good luck with the F award seat!
thanks,
paul
Thanks for the reply Paul. Good to hear!
Maybe I missed this important bit out in the article, but will ask it anyway.
If you apply for 1 new credit card a year, and then cancel the previous card after a year and this have multiple applications for credit. Does this negatively affect your score and does this record get cleared?
More on this coming in the next article 🙂
General Advice Warning: This information may be regarded as general advice. Your personal objectives, needs or financial situations were not taken into account when preparing this information.
You should consider the appropriateness of any general advice provided, having regard to your own objectives, financial situation and needs before acting on it.
Hi there Earl,
Thanks for the question – in short, yes – each application for a new credit card will be recorded on your credit file. Part 2 in the series has more details on this. Any credit enquiries will remain on file for 5 years.
At this stage cancelling one of the cards is unlikely to much of an impact as very few credit providers are sharing positive credit reporting data – see part 3 for more on this.
thanks,
paul
If I enquired the credit check by Vera and Dun, Will it drop the scores?
Or only the the other party enquired reduces the scores?
General Advice Warning: This information may be regarded as general advice. Your personal objectives, needs or financial situations were not taken into account when preparing this information.
You should consider the appropriateness of any general advice provided, having regard to your own objectives, financial situation and needs before acting on it.
Hi there Kenden,
Thanks for the question – if you obtained a copy of your credit report from Veda & Dunn and Bradstreet, this will not impact your credit file. If you applied for a product from a credit provider, they may have made an enquiry at a Credit Reporting Body (e.g. Veda, D&B, Experian).
thanks,
paul