What exactly is a credit report and how can you ensure your credit score remains top notch? Nicky Burridge finds out
If you have ever been turned down for a credit card or loan, chances are your credit report is to blame.
A credit report is a summary of a consumer's history of borrowing and repaying money. Lenders use the reports to assess the risk of advancing further credit to customers, while in some cases the reports also influence the interest rate charged.
What is a credit report?
Credit reports in Hong Kong are put together by a privately owned credit reference agency called TransUnion.
The report is typically several pages long and the information falls into five main categories.
There is public information, such as the consumer's name, date of birth, Hong Kong ID card number and current and previous addresses and telephone numbers.
There is information provided by TransUnion member companies, such as banks and finance firms, showing how much money the consumer owes, and whether this is secured debt, such as a mortgage; unsecured debt, such as a credit card or loan; or hire-purchase finance, such as for a car purchase.
It also shows the repayment period, if the consumer has ever missed a repayment or been late with one, and whether the debt is still active or repaid. It also lists debt defaults. Another category covers information from public records, such as any litigation relating to the recovery of debt, bankruptcy or any winding up petitions.
The report also contains a list of enquiries from member companies that have requested the credit report in the past two years.
Finally, there is the credit score, which grades consumers' credit history on a letter-based scale.
Although some of the information in a credit report is public information, the report itself falls under the Code of Practice on Consumer Credit Data. Only credit providers who are approved members of TransUnion are allowed access the reports.
How a credit report is used
TransUnion's data is used by financial institutions to help assess credit risk management. For example, it states that 99.58 per cent of the population with a category C credit rating will fulfil their credit commitments during the coming 12 months.
Individual banks all have their own lending criteria, so what will be deemed an acceptable credit score by one bank, may not be viewed in the same way by another lender.
Some lenders also use credit scores to do risk-based pricing, under which they base the interest rate a consumer is charged on their credit score.
Mark Rawson, chief executive of The Henley Group, said he had come across one bank that increased rates on a mortgage repayment by more than 50 per cent for substandard credit ratings.
The credit report is also only one piece of information used by lenders, with them also taking into account other factors such as their own internal risk scores, their relationship with a customer, and whether the customer has any collateral or guarantors.
Having high levels of debt, particularly if you have a high balance-to-credit ratio on credit cards, loans and overdrafts, can lower your credit score. If you get into a position where you are financially overstretched, the best course of action is be upfront about your credit problems with the relevant financial institution.
"If you do get in trouble with a payment, communicate with the institution regularly as this may prevent them 'reporting' a problem to the rating agencies," Rawson says.
Perhaps surprisingly, not having ever borrowed money can be a significant impediment. Instead, financial institutions prefer a track record whereby they can gauge creditworthiness.
Expats who have recently relocated to the Asia-Pacific region can encounter problems related to their brief credit profiles.
"Most Hong Kong banks will work on the history they can see locally, and as such there will be limits on amounts that a newly arrived person can borrow and on what terms," Rawson says. "These will improve as a person's local history expands."
Your credit score is also likely to be negatively affected if you have a lot of recent inquiries from potential lenders, as this may suggest you are experiencing financial difficulties. It could also be a sign that you have been turned down by some of the banks you have approached as you are considered high risk.
Improving your credit score
If you do have a low credit score, the good news is that there are steps you can take to improve it.
The most obvious thing you can do is ensure that you make all your repayments on time each month.
Angus Choi, managing director of TransUnion in Hong Kong, said: "The best way to build your credit score with a credit card is to use your card prudently and pay the balance on time each month.
"It is possible to improve your credit score in six to 12 months."
Maintaining an outstanding balance well within your credit limit, will also help to boost your score.
It is also important to avoid applying for too much credit at one time, or to too many different lenders. Instead, target lenders where you are most likely to be successful.
Finally, check your credit report to ensure that all of the information in it is accurate, and correct anything that is wrong. This can be done by completing a personal data correction form, which can be downloaded from TransUnion's website.
If you have fallen behind with borrowings or even defaulted on debt in the past, time will help to repair your credit score.
Details of late repayments and defaults remain on your credit report for five years after the debt has been settled, while a petition for bankruptcy remains on the record for eight years. Legal action by a financial institution to recover debt will remain on a credit report for seven years from the time proceedings were initiated.
Everyone has a right to see their own credit report. You can order a copy through TransUnion's website for HK$220. You can also order a copy by telephone or in person.
Consumers are entitled to a free copy of their credit report if they have a credit application rejected and the lender used a TransUnion credit report in making their decision.
If you had a loan application rejected because of inaccurate data, you can also request that the bank reconsider your application.
Consumers are also allowed to add a brief statement to their credit report giving their point of view if there is a dispute over data. A consumer comment form can be downloaded from TransUnion's website. Comments must be submitted in English and limited to 40 words.
Even if you have not applied for a loan or credit card for quite a while, regular monitoring of one's credit status is recommended .
Doing so will also alert you if you are the victim of identity theft, and a fraudster is applying for credit in your name. It's also a good idea to ensure that the data on your credit report is accurate and up-to-date.
TransUnion's Choi says regular monitoring of your profile is a good habit to develop.
"Monitoring your credit report enables you to detect unauthorised changes that may indicate fraud, as well as errors that may appear on your credit report," Choi says. "With the growing threat of identity fraud, it's important to keep a close eye on your credit."
TransUnion offers a credit monitoring service for HK$180 a year, under which subscribers receive an email or SMS message every time a new credit account is opened or an application enquiry is requested.