Australian credit reporting bureau Equifax has rolled out a new credit score system and it could mean your credit behaviours are better reflected.
The new scoring system, Equifax One Score, aims to provide greater consistency and reliability than other scoring systems.
It was developed to in response to:
- Comprehensive Credit Reporting (CCR) reaching critical mass;
- The Australian consumer credit landscape moving away from credit cards in favour of Buy Now Pay Later products, and;
- A global pandemic leaving missing Repayment History Information (RHI) that could affect credit files for months or years to come.
Equifax claims that as consumers begin to understand and accept that Equifax One Score is a dependable assessment of their creditworthiness, they will increasingly learn to leverage the value of data in order to negotiate on credit rates and terms.
While the overall concept and purpose of Equifax One Score is much the same as other credit scores, there are a number of key differences that make it unique.
What makes Equifax One Score different to other credit scores?
1. It factors in up to five years of credit enquiry and defaults trends
Equifax One Score was built using both short and longer-term RHI, plus up to five years of credit enquiry and defaults trends.
Because of this, lenders are able to assess borrowers’ creditworthiness based on a broad range of data, instead of being limited by data that may be missing or not useful – such as changes in payments due to mortgage deferrals in the time of the COVID-19 pandemic.
2. It draws on alternative data sources such as Buy-Now-Pay-Later (BNPL) services
In the past, individuals may not have had a credit history or credit score until they had taken out some kind of conventional personal finance product, like a credit card.
However, Equifax’s new scoring system draws on alternative data sources, including BNPL services like Afterpay, Zip, Klarna and many others.
For this reason, Equifax One Score can be useful in determining the creditworthiness of thin-file credit applicants who have used BNPL services. A thin-file applicant is a consumer with little to no credit history – often young adults.
The issue thin-file applicants might normally face is that lenders may find it difficult to determine their credit behaviours and in turn either deem them too much of a risk and reject their application, or offer them a high interest rate that reflects the level of risk.
3. It can help provide consumers with greater accuracy and transparency around how decisions are made
According to Equifax, the new system provides consumers with personalised reason codes for credit application outcomes, allowing applicants to better understand why their credit application was accepted or denied.
This could give those who have had a loan application rejected a better opportunity to take actionable steps to improve their creditworthiness before reapplying for credit.
What will this mean for my credit score?
The rollout of Equifax One Score could potentially improve your credit score, reduce your credit score or not have much of an impact on your credit score at all.
For example, if you are a responsible and reliable borrower when it comes to traditional credit products (such as credit cards and personal loans), and this transfers to your track record with BNPL services, then Equifax’s new scoring system may not significantly impact your credit score – or you could even see an improvement.
If you have a habit of allowing your BNPL payments to fall behind or get out of hand, then you could see your credit score dip in response to the rollout.
And if you have a thin credit file, but are a responsible user of BNPL services, you could see your chances of credit approval strengthen as lenders are given a better picture of your positive credit behaviours.
What can I do to ensure my credit score remains in good shape?
Whether or not the introduction of Equifax One Score has an impact on your credit score, working on your credit habits could put you in a better position to achieve, or maintain, a good credit score.
Some credit habits worth harnessing include:
- Regularly checking your credit score – RateCity’s credit score hub can provide you with fast access to both your Equifax One Score and Experian credit score for free. It’s worth getting into the habit of regularly checking your credit history because inaccuracies can occur, and you won’t be able to have them corrected if you don’t know they’re there.
- Limiting your usage of BNPL services – Because BNPL services split your repayments into smaller segments of the total cost of the purchase, it can sometimes seem like less of a commitment than it really is. The issue you could face is overcommitting to repayments, as even small amounts can quickly add up. If you do overcommit and don’t have the funds to make the repayments when they are due, you may not only be stung with late fees but also risk damaging your credit score. For this reason, it’s important to treat BNPL services much the same as any other credit product.
- Demonstrating consistently positive credit behaviour – Equifax One Score factors in up to five years of credit events. This means that negative events such as defaults can affect your credit score for years to come. It’s worth focusing on consistently paying down your debts in order to avoid getting into financial strain and risking missed payments. If you need help managing your debt, consider reaching out to financial counsellor via the National Debt Helpline.