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GUEST OBSERVATION
Looking closely at the new credit reporting system introduced in March this year leaves many people feeling a little overwhelmed.
But the first step to making any step forward, especially with your finances, is to get educated.  If you missed part one, <a href="/expert-insights/finance/35351-sept-9-observer-the-new-era-of-credit-reporting-are-you-ready-part-1" target="_blank">check it out here</a> to get up to speed on the changes and what it means for you as an investor.
Having seen how the consequences of credit reporting adversely affects my clients, I feel that there should be greater control on what is placed on someone’s credit file before it’s registered. The onus should not be on borrowers’ to later prove that any one item shouldn’t be there.
You’re probably curious whether there is any good news? Yes! In fact, the great news is that there are lenders that don’t use credit scoring in conjunction with the credit report. I hope that this remains the case with the changes.  These lenders look at the logic of the credit report history.  For example an active investor could have multiple enquiries if they were restructuring a loan as well as completing two purchases  - this isn’t necessarily a bad thing.
The other lenders that rely heavily on the scoring actually lose the opportunity to build relationships with strong clients.  Now, you may assume that lenders that use the basic credit fundamentals instead of credit score systems are second-rate lenders, though they’re certainly not, nor do they charge higher rates. In fact in some cases, their products are often better and we need to start rewarding these lenders with our business, and reduce the market share of the big four.
It’s extremely important that every person understands what credit suitability means and manage their own accordingly. You want to do this before you apply for a loan to avoid any nasty surprises during the application process.
Steps to accessing and understanding your credit score.
 
<ol>
<li>
Get a copy of your report ASAP from <a href="https://www.veda.com.au/" target="_blank" style="line-height: 1.3em;">Veda</a>. 
</li>
<li>Review this carefully and highlight any errors.  Then you’ll need to begin the process of removing them. This isn’t an easy process and whilst there are some good companies out there to assist be wary of scams. I encourage you to do due diligence carefully before engaging these companies. </li>
<li>Assess your own risk. Would you really lend yourself money? What is your relationship with money and how you handle debt?  Do you go from job to job and have no stability?</li>
</ol>
 
Ways to improve and manage your credit situation. 
<ul>
<li>Pay your all loans on time (it does matter if it’s one day later) and keep your credit facilities under the limit. Also pay other accounts like telephone, rates, Foxtel on or before the due date. 
</li>
<li>Be still. Manage your stability and changing jobs every three months isn’t going to help your credit score and no doubt is a sign that you aren’t happy and need to look at what is causing this job dissatisfaction.  This doesn’t mean don’t ever change or follow your career path but applying for loans in the middle of a changeover doesn’t help your application. 
</li>
<li>Complete a budget and review regularly to ensure you know your numbers. 
</li>
<li>Don’t apply for unnecessary unsecured personal debt &amp; don't chase the 0% interest balance free transfers.  It can cost you a lot more than the interest you are trying to save. 
</li>
<li>Use a good mortgage broker that knows lenders policy and do as much work upfront like valuations and also credit checks to improve your chances of getting approved at the lender you apply for.</li>
</ul>
Remember, lenders will lend based on risk before profit.  Manage your credit file, limit your bad debt, be an example of stability and you can have a better chance of obtaining good debt to start or grow your investment property portfolio.
MICHELLE COLEMAN is an award winning finance broker and managing director at <a href="https://www.wfinancial.com.au/" target="_blank">W Financial</a>.
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mcoleman-u4QTxPRvfF

Understanding your credit score and how to improve it

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On the surface, the credit approval system seems straightforward.
Your credit approval result will typically be determined by your credit report in conjunction with each individual lender’s credit scoring system. Every application for finance will trigger a credit check or credit report to be obtained.  This is only with the permission of the borrower and usually in the form of a signed document called a Privacy Notice, or an Acknowledgement and Consent.
But changes introduced in March this year brought a new era of credit reporting. The previous system that you would be familiar with contained only “negative” credit information – it didn’t state the outcome, good or bad, for any enquiries - only reporting arrears, defaults judgements or similar information. However, the system has evolved toward a new “positive” credit reporting regime, a concept is currently applied in the USA and New Zealand.
As you might assume, positive credit reporting also includes ‘positive’ information about an individual’s credit position. So along with all the missed payments and default judgements, your credit report can now include five additional pieces of information relating to your current credit commitments:
<ul>
<li>Type of account (e.g. credit card, home loan etc.)</li>
<li>Date the account was opened and closed</li>
<li>Details of the credit provider</li>
<li>Credit limit placed, credit utilisation rate and balance of the account</li>
<li>Repayment history</li>
</ul>
This extra information is believed to reward clients who have better credit habits with a higher credit score, and fairly so. Interestingly, even though it’s been presented as positive reporting, it actually can be a negative for some clients. As an investor, you need to know what you should do to ensure you get the best score possible.
From a lending perspective, the move to the new reporting system has gone through with a few clunks. In some instances, they have tightened up and a few borrowers have been caught in the middle.
Previously, borrowers who may have had no official black marks against their credit file could still score well, even if they were tardy with their repayments or not adhering to the limits of their credit facilities. Many people are not adequately educated about the hazards of bad money habits; paying just a little late has a seriously negative impact on their credit scoring which isn’t something properly addressed a lot of the time.
It has been my experience that lenders by nature will never give an applicant the benefit of the doubt, preferring to decline an application than take the risk.
As I mentioned above, most consumers don't fully understand the implications of credit checks or applying for credit. Each time you apply for credit, the enquiry is listed; the amounts and frequency can affect your scoring. This is the same if you go to a new bank or apply to increase your existing limit. Lenders don't exactly explain this when you apply for credit either.
So shopping around for the cheapest credit card and applying on line and pressing that "APPLY NOW" button should really be followed with a big warning checking that you understand that this could seriously affecting your rating.
It’s frightening to see some of the articles written about how to improve your score, and I really encourage everyone to think carefully before actioning any advice offered to them regarding this matter. Some people suggest that you need to get credit cards to help your credit rating and tips how to play with balances and having them, even if you don’t need them.
Others suggest spreading the type of loans around but clients with unsecured personal debt score low with most lenders, unless of course the credit card is one of theirs.
To expand on this, it is common practice by all lenders that an automatic credit check is performed for every loan lodged.  This means that in cases of an active investor, multiple enquiries may occur on the file of the same client from the same bank. If the client is using Lenders Mortgage Insurance, they will then also have the insurer’s enquiry logged in addition those of the lender.
A more common sense approach could see only one enquiry being registered per client at that time, and the information being shared with the insurer.
Admittedly all this does sound a bit daunting.
But remember, being aware is the key to making an informed decision and positive changes in any situation, and your credit report is no different.
There are of course plenty of ways to ensure you’re on top of your credit score - we’ll go into that next time!
MICHELLE COLEMAN is an award winning finance broker and managing director at <a href="https://www.wfinancial.com.au/" target="_blank">W Financial</a>.
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The new era of credit reporting: Are you ready?

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GUEST OBSERVATION
All lenders require building insurance before a loan settles, but what about the very thing that is going to repay the loan? You!
Whilst we don't necessarily want banks enforcing borrowers to take up their insurance, as an investor or anyone that is taking on any type of debt it’s vital that you review your personal insurances (life, trauma and disability) as well as income protection.  
The funny thing is people will insure their cars, boats and even pets without hesitation, but when it comes down to the bigger assets like their lives and their property portfolios, their coverage too often falls well short.  As a mortgage broker, this is unnerving when I consider that more than one in five Australian families will be impacted by an tragic event in their working lives, and 95% of those families will be underinsured.
I don't speak to my clients about the specifics of insurance, but I do refer them on to my top insurance advisor for health checks.  It’s scary how uninsured people are when it comes to their financial wellbeing.  In fact, in any unfortunate situation that one person that is inflicted with either a temporary or permanent disability or serious illness or worst-case death; the typical family income will drop by more than half. Can you imagine how a family or a person can survive after the living expenses like food, utilities, childcare and mortgage repayments come out. Let alone further costs through medical expenses.
<blockquote>
People will insure their cars, boats and even pets without hesitation, but when it comes down to the bigger assets like their lives and their property portfolios, their coverage too often falls well short.
</blockquote>
It’s easy to panic when you hear all the frightening statistics and react by calling up the first company that comes up under ‘risk insurance’ in your search, but beware of the offers like those on the television promising cheap cover with one quick call.  Risk insurance can be really quite complex to get right.  The best way to this is to speak to a top financial planner to get you the best value for your money and be adequately covered.
As part of the finance process, now mortgage brokers need to check that you are aware of insurance and if you think you are adequately covered. Most people assume they have enough cover in the superannuation but often don't know what it exactly is when asked.  It is common to think, as I used to think it myself, that when someone offered to review my insurances I was getting sold something I probably didn’t need.  Though times have changed, and as an investor today your debt levels are at higher levels, you need to take this into consideration.
I have been fortunate enough to not have a client be in the position to claim under their insurance and I hope that this is the case for all my future clients.  However, I have had people that I know personally that have been caught out by devastating events; if they were insured, their lives would be very different now.  A family friend had a stroke at, aged only 38; he has a lovely wife and three children. He ran his own business, and their whole lives changed as he was the sole income earner with no back up plan, or adequate insurances in place.  The pressure to return to work was massive, and still after five years he is still struggling with his health.  It is heartbreaking.
Imagine for a moment this was you.  As we forge ahead building up our investment portfolios, I feel we can sometimes take even our most basic provisions for granted.  Though imagine a life where not only paying essential household expenses presented a challenge, but dreams of education or holidays needed to be shelved indefinitely.
Even if you think you are covered it never hurts to get a second opinion, especially when it comes to the most important asset - your life.  A financial planner will give you a complimentary review for insurances and not charge any fees and a good time to check is always when you are applying for finance.
Life is important, not just yours, but your family’s as well.  If you’re not absolutely sure you are adequately covered, it might be time to get that health check.
Michelle Coleman is an award winning finance broker and managing director at <a href="https://www.wfinancial.com.au/" target="_blank">W Financial</a>.
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Why do people not insure their lives and portfolio like they would their cars?

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GUEST OBSERVATION
"Property investing is risky – do you really want to do that?"
I am sure you will have heard this before. I know I have, and so have many of my clients.  Deep down you have this urge that you should do something about your financial future but you are constantly getting all these “expert opinions” from family or friends that have lost money, or heard about someone that has.
But you still find yourself wondering whether property investing is safe. Are they right?
The truth is all forms of investing have an risk component.  From shares, to businesses, property or even simply investing in yourself – they all come with an element of chance. You may lose your money or even worse, they might cost you more money than you originally put in!  
Personally, I would run in the opposite direction from anyone that tells you that they have a foolproof investment because there is no such thing.  However, there are provisions you can put in place to help reduce your risk exposure, and they might not be what you think.
What’s one of the top provisions I suggest to my finance clients weighing up the ‘riskiness’ of any property investment opportunity?
In case of emergency, have a buffer. 
Always factor in a buffer to your figures to lessen the impact of unexpected events you may be affected by. These may include things like being without tenants for some time or abrupt shifts with your employment.  No matter the income you earn, or debt level you have, having a buffer is vital to your portfolio’s existence.
Depending on your situation you may want to consider applying for more than you need.  Banks like to give you money when you don’t need it so much, not when you do.  You don’t pay interest on the funds you don’t spend, so if you are able to, get more than you need for your purchase so it’s there if you need it.  
On the other hand, if you’re really pushing your limits for your purchase and don’t have room to do this, it may be time to reconsider the investment opportunity.  Investing is great, but if it has the potential to put you and your family under financial strain, or dramatically affect your lifestyle in the face of unexpected events, it’s not going to be beneficial at all.
Another way of incorporating a buffer into your finance strategy is to use lenders mortgage insurance (LMI).  This insurance protects the lender, not you as a borrower, but can allow you to borrow more than you could without it.  LMI can be a contentious issue, as many mortgage brokers don’t believe in utilising it, even for more dynamic investors. In truth it is quite a complex area but using LMI, if properly considered, can be a great tool for creating buffers and thus reducing risk exposure.  
It seems counterintuitive to borrow more to reduce your risk, but if you can safely do so it really is a game changer. Of course, it is always best to discuss the pros and cons of your own situation with a broker before making this kind of decision.
Finance can be tricky but it’s not a mystery by any means.  It’s through taking a step like incorporating a buffer that you are able to start to structure your finances and your mindset around risk in a different way, easing the pressure around starting to build a property portfolio.  This not only helps you feel more comfortable taking control of your financial future, but in some cases can be very liberating for property investors.
Michelle Coleman is an award winning finance broker and managing director at <a href="https://www.wfinancial.com.au/" target="_blank">W Financial</a>.
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Michelle Coleman

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