PART 3 – The impact of financial hardship on your credit report

The article is part 3 of a 3 part series that looks at credit reports and credit scoring.

By Mike Laing, Chief executive of the Australian Retail Credit Association

You can find yourself in financial hardship when something happens to you that impacts your ability to make your loan repayments on time or puts you in a position of having to choose between making your loan repayments and being able to afford other important expenses (e.g., food, housing, electricity etc). Natural disasters are a good example of when this might happen, but other circumstances such as illness, job loss, or relationship breakdown might also lead to financial hardship being experienced.

If you are experiencing financial hardship and making repayments on loans is or will be a struggle, then, as soon as you are able, it’s wise to contact your credit provider and talk to them about your situation.

Lenders understand circumstances change and people struggle from time to time, and they can provide help.  In fact, if you ask for help the law requires them to assess you for a ‘hardship variation’. Lenders also understand that everyone’s circumstances are different, so different types of help may be available e.g., the credit provider may agree to change your payment terms to give you more time to pay, or to reduce your regular repayments for a period.

Talking to your lender also makes sense because if you don’t and financial hardship means you stop making your repayments on time (or start paying less than the minimum repayment), that will start showing up in your credit report. That’s because under normal circumstances, missed loan repayments are recorded in consumers’ credit report as part of the 24-month record of repayment history information. Each month you miss a payment, the repayment history information will worsen.

If you do receive hardship assistance from your lender, how that assistance is reflected in your credit report will currently depend on the type of assistance and the lenders policy. However, most lenders who have been offering COVID-19 payment pauses or deferral to people needing assistance aren’t reporting those as missed payments. Most just simply stopped reporting repayment history during the period of assistance, while some reported repayment history information as being “up to date”.

It is important to note however, that no lender can report the specific reasons for you being in hardship on your credit report.

Because there is no standard approach as to how lenders report people receiving hardship assistance, the law has been changed, and so from 1 July 2022 a standard approach will come into effect.  The changes will mean:

  • The repayment history information on your credit report will reflect what was agreed under the financial hardship arrangement. For example, if the lender agrees for you to temporarily make half your normal repayments, your credit report will show that the payment has been made if you meet that agreement.
  • The credit report will also put a ‘flag’ alongside your repayment history information that means that the repayment history is associated with a special arrangement – in the credit report this will be referred to as ‘financial hardship information’.

So now and into the future, if you are struggling it is better to talk to your lender and see what assistance can be provided, and doing so will reduce the chance of having missed repayments recorded on your credit report.

Receiving hardship assistance also doesn’t have to impact whether you can access credit in the future.  If you were to apply for a new loan with a different lender, what’s in your credit report is only the start of the conversation. Lenders would obviously want to know if you had received assistance due to hardship. But before agreeing to lend, lenders will take your whole situation into consideration – not just whether you needed help with repayments because of hardship, but also things like what your income and expenses will be going forward.

Who is CreditSmart? 

CreditSmart is an information website (www.creditsmart.org.au) created and supported by credit experts to help consumers understand how credit reporting operates in Australia. It aims to help consumers take control of their credit health and understand how recent credit reporting reforms affect them, by providing information about the system that is unbiased and fair. The CreditSmart website is owned by the Australian Retail Credit Association (ARCA), which is the peak body for organisations involved in the disclosure, exchange, and use of credit reporting data in Australia. 

Further reading on what can impact your credit score, you can check out, the following articles: does applying for a credit card hurt my credit score and does pausing payments affect your credit score?

 

Mike is chief executive of the Australian Retail Credit Association since July 2017 and was the ARCA Board Chair from September 2012 – March 2019.

He is an experienced Director and senior executive with experience across Australia, New Zealand, the United Kingdom, and Ireland. Mike holds a Master of Commerce (Hons I), is a graduate member of the Australian Institute of Company Directors, and a member of the Chartered Institute of Arbitrators.

 

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