Wednesday, 7 February 2007

Comparison of Australian and US Lending Criteria

Gerad emailed me an interesting question in response to my post "It's Raining Credit":
I was wondering if you could do a post on how the credit system works
in Australia... i.e. do you need to have a credit card to get a good
interest rate for a car loan etc/if the situation is similar to the US.
I've been reading a lot of US literature but being in Sydney, I don't how
things work here...

I don't claim to be an expert, but I can summarise the main differences as I see them:
  • In the US you get a CREDIT RATING (FICO score) based on details of your credit history. In Australia your CREDIT REPORT doesn't provide an expliciti SCORE, it just records who has accessed your credit history, and will record details of late payments, defaults and so on.

  • In the US the interest rate you pay on home loans, credit cards etc. appears to be based largely on your FICO score. In Australia lenders will assess applications based on information provided (income, other debts etc) and use your credit report to check for bad debts and so forth. As your credit report doesn't include a specific score, the interest rate on home loans, credit cards etc. is generally standard for all borrowers - the lender just decides whether or not to extend credit to you.

The benefit of the Australian system is that it is probably much easier to get your first loan, credit card or whatever. As long as you have sufficient income, and a stable residential address, lenders will be happy to approve credit to a new borrower. The downside is that if you have an excellent credit history they will throw offers at you to increase your credit limit, but generally don't adjust the interest rate (one common exception is that home loan interest rates are generally a bit lower for "gold" customers - those with large loan balances and good credit history).

Recently GE Money has started to increase its presence in consumer lending in Australia, and I've seen ads with "interest rate FROM x.xx%" which indicates that they will be setting interest rates individually for each borrower, based on their credit history.

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