The Dark and Secret World of New Zealand Credit Scoring

Rob Stock is a Stuff business journalist specializing in money and consumer issues.

ANALYSIS: In July, I met a woman who had recently come out of an abusive relationship.

This meeting launched me on a frustrated and disappointing journey to understand how the zero to 1000 credit scores assigned to each of us actually worked.

After the relationship ended, a loan company sued her for the entirety of a car loan her former partner had used to buy a car.

Charity Good Shepherd managed to persuade Aotea Finance to split the loan and only sue her for half, but it destroyed her credit rating.

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Banks, including the Bank of New Zealand, are canceling some loans taken out by victims of domestic violence, but are reluctant to talk about it openly, fearing a series of misrepresentations.

Prior to the abusive relationship, the woman was good with money, but now had a credit score of around 200.

Credit Simple, owned by credit reporting company Illion, says your credit score shows how creditworthy you are and a good score is over 500.

good shepherd

Good Shepherd Chair Diana Crossan asks Fincap policy adviser Jake Lilley and BNZ managing director of customer care Martin King about the policy of lenders who write off debt for women forced into debt loans by abusive partners.

Those with good scores get better offers from banks, telecom operators, insurance companies and electricity companies. A bad score can make it harder to get a rental, and sometimes even a job.

And yet, this woman’s score did not reflect her ability with money, but her past abusive relationship. It would take several years of good payment behavior to repair its score.

A bank told me that when it canceled loans to victims of domestic violence, it also helped them clean up their credit reports.

For every escapee from an abusive relationship who receives this help, how many do not? This was the first of many questions that I have yet to get an answer to.

The credit reporting system is an extensive financial monitoring system.

When we register with a bank, insurer, obtain a loan or open a feeding account, we “consent” to their passing information to the three credit reporting companies: Illion, Equifax and local company Centrix.

They compile credit reports on each of us and calculate credit scores.

The system helps trade, we are told. It allows lenders to decide who to lend to and at what price. It helps power companies decide who should pay up front for their electricity.

In the United States, scholars have accused the credit reporting system of being racist, as well as entrenching poverty and privilege.

The credit score is an American invention.  It was created in the 1980s and hailed as enabling more people to qualify for loans.  Critics say the system is unfair and entrenches poverty, especially among ethnic minorities.

PA

The credit score is an American invention. It was created in the 1980s and hailed as enabling more people to qualify for loans. Critics say the system is unfair and entrenches poverty, especially among ethnic minorities.

That’s because, like the abuse victim I met, people with lower credit scores find life harder and more expensive.

In New Zealand, studies of the sector do not seem to have been done, including whether the system is biased and whether it is used for legitimate purposes.

A senior property manager told me that after two decades in the business, he felt the scores had no predictive value for whether tenants would pay their rent on time.

A credit score and credit information is only useful if it has predictive value.

After meeting the abused woman, I had a second credit score shock when I applied for a $15,000 loan from Latitude for a story verifying the lender’s advertisement that it offered loans “from 8 .99%”.

I had a credit score of 984 out of 1000 on my Credit Simple credit report, yet I was offered a 20.99% loan.

Latitude said there was an error in the information given to it by Equifax.

Equifax gave me a credit score of 832.

I still had two questions: how can I have two scores out of 1000 so different, and how often do people get offered overpriced credit because of mistakes?

I checked my score at Centrix. It was 866.

What explains the differences?

Centrix chief executive Keith McLaughlin said part of the variation was due to not all credit reporting companies having the same information.

Centrix chief executive Keith McLaughlin says a low credit score makes someone's life harder because it means more expensive credit.

Abigail Dougherty / Stuff

Centrix chief executive Keith McLaughlin says a low credit score makes someone’s life harder because it means more expensive credit.

“We have a lot more comprehensive data in our systems than others,” McLaughlin said.

“It allows us to be much more precise and much more precise.”

Could this mean that the cost of a loan could partly be based on the choice of credit bureau by lenders? How would that be fair?

If my three credit scores accurately reflect my creditworthiness, then my three scores of 832, 985, and 866 should all represent the same risk of me defaulting on a loan.

I can’t tell you if that’s the case because while the three credit reporting companies provide analytical reports to their customers (like banks, power companies) they don’t share them with the public. .

I asked for help understanding the scores, but foreign companies Illion and Equifax refused my requests, prompting this reaction from McLaughlin: “I’m quite surprised, because credit scores are very important in the life.”

Centrix was more open. Its credit ratings represent the risk that a person will default on their payment obligations over the next 12 months, if the trends of the past 12 months repeat.

If a lender gives loans to five people with a score of 559, they can expect one of the loans to have missed payments.

A score of 192 means the lender can expect only 0.17 good accounts for every bad one. A score of 781 means he should get 27 good counts for one bad.

Centrix credit scores range from zero to 1000. We all have one, and they indicate how creditworthy we are.  Source: Centrix

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Centrix credit scores range from zero to 1000. We all have one, and they indicate how creditworthy we are. Source: Centrix

My Equifax credit file contained a “relative risk” score of 19.32. His call center didn’t know what that meant.

Eventually, I received a short email from a public relations person at Equifax saying, “A relative risk of 2.5 means the candidate is 2.5 times better than the population average.”

So I’m 19.2 times less likely to default on an account than the average person?

To complicate all this, banks and property managers decide how to use the scores.

After several frustrating weeks, I have a growing list of questions about the accuracy and fairness aspects of the credit reporting system.

It works for people like me, mostly it seems, but does it let others down and entrench iniquity?

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