18/02/2021
Unfortunately many people and businesses are going to struggle over the coming months and while we’d all like to think this whole crazy mess will be over soon, I fear the reality is we’re entering into a protracted period of financial challenge, none of us have never seen before.
I would expect the banks and other lenders to be understanding and help those who are struggling to keep up with their bills due to Corona fallout. However, the fact remains that in most cases they are within their rights to list a default on a borrower’s credit file after an account is sixty days overdue, and just because perhaps they shouldn’t doesn’t mean they won’t.
Once a default has been recorded on a credit file it remains there for five years, regardless of whether it’s paid or not. If you think getting approved for finance is tough now, just try and get a loan approved when there’s a default on your credit file. Even in the current market it can be next to impossible, at least at reasonable interest rates. The reason for this is most credit providers such as the banks use credit files as one of the key documents when working out who to approve and decline for a loan. In many cases the initial application process is fully automated meaning that it’s a computer that looks at the credit file and a default often leads to an instant decline.
As lenders credit policies get tighter, maintaining a good credit rating is very important, as without this finance options tend to run out very quickly. For many, struggling with debts will be inevitable given the current economic situation, but the key is making sure you’re doing all you can for the best chance of recovery when the world starts to recover from all this craziness.
The key to protecting your credit file is communication with the lender early. I understand this can be a very hard thing to do. It’s common to be worried about making this all-important call as many people expect the lender will be aggressive and unhelpful, but they are usually the complete opposite, especially now.
The reason communication with the lender is so important is until a delinquent account is manually removed from what is for the most part an automated recovery process, the credit provider will send demand letters and without contact from the borrower, will ultimately list a default. Once a default is recorded it can be very difficult if not impossible to remove.
When a borrower contacts a credit provider about an account they are having trouble with, they will typically end up talking with someone from the financial hardship department and in most cases this person will work with the borrower to help them to get back on their feet. While the borrower continues to communicate with the creditor, and they are working towards the resolution of the problem account, it is very unlikely a default will be listed.
The banks have already put several positive policies in place when it comes to helping their clients through what are very challenging times and I’m sure they will continue to do so.
One area not often publicised is the option of changing your repayments to interest only. It’s important to remember that variable rate interest only home loans have no repayment limit thus you can still pay principal if this suits you and also have this available in redraw if needed. The added benefit is that you won’t be technically in default as you are still making your payments although at a much lower payment amount.
My advice is to not immediately take up the Banks offer of a repayment holiday unless you absolutely need to do this to protect your home or business. You should always use alternate options if available and also seriously consider the interest only option of that suits.
Also, what isn’t said in the media is there is a corporate credit history which is recorded however may not translate to a note on your public credit file. Negative notes about cash flow issues and action taken to give client relief are recorded and when it comes the time when you look to seek additional funds after the virus issue concludes, this may be an impediment to you getting credit with your existing banking relationship. It’s very important you speak with me before seeking further credit as changing lenders can be an easy fix to this issue.
Over the next few months if you find yourself unable to keep up with your loans get on the front foot and call me and your credit provider early. This will not only relieve some pressure as you won’t be living in fear of what they might do, but it will most likely help to protect your credit file in the process.
Be strong, be proactive and make sure you get professional advice before making a decision.
