Episode 91: How to ruin your credit rating
14th May, 2024
In this episode of the Financial FOFU Podcast, Trudi Cowan and Sarah discuss credit ratings and their importance. They explain that a credit rating is a rating of your risk around borrowing money, which banks and suppliers use to determine if you're a good or bad risk. They also discuss the difference between a credit rating, a credit score, and an internal bank credit score. They mention that credit ratings are tracked by four different agencies in Australia and that different agencies may have different numbers. They also explore the factors that impact credit ratings, such as missed loan repayments, unpaid bills, and even having a home phone number. In this conversation, Sarah and Trudi discuss the importance of regularly checking your credit file and the potential impacts of payment defaults and court judgments on your credit rating. They also touch on the role of credit repair agencies and the significance of credit scores in obtaining finance. The conversation emphasises the need for businesses to conduct credit checks on potential clients and the risks associated with lending equipment without proper precautions. The key takeaways include the importance of monitoring your credit file, understanding the impact of defaults and court judgments, and conducting credit checks in business transactions.
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Podcast Transcript Available Here
Trudi Cowan (00:11.82)
Hello and welcome to another episode of the Financial Feifu Podcast.
Sarah (00:12.025)
Hello, hello.
Sarah (00:17.145)
Hey Trudi, how are you going today?
Trudi Cowan (00:19.244)
Very well, very well. Ready to have another very interesting conversation because we've got a great topic lined up today.
Sarah (00:26.489)
Mm -hmm.
Trudi Cowan (00:28.716)
Today we are gonna talk about credit ratings, which has come up a little bit in lots of conversations we've been having lately. So it's probably a topic that's really useful for people to have a bit of an understanding about, because I think it's probably not, we can't all know we have a credit rating, but I think a lot of people don't really understand what it's for and what impacts on it.
Sarah (00:37.977)
Yeah.
Trudi Cowan (00:55.884)
So we're gonna unpack some of that today.
Sarah (00:58.233)
and important information that every person should know about, not just a business owner. Obviously it has further implications when you are a business owner and if you've got multiple structures or entities, it changes things as well. So what is a credit rating in simple terms? Why don't you go first and then I'll tell you what I think it is.
Trudi Cowan (01:21.308)
my God, well, mine might be simple terms, mine will just be the very layman's understanding of the credit rating, which is, I guess, a rating that is your risk around borrowing money. And it's the rating that banks and suppliers often use to determine whether you're a good risk or a bad risk.
Sarah (01:25.057)
Yeah, putting her on the spot here.
Sarah (01:40.889)
Yeah, so it's a standardized metric which works out whether or not you'll pay back money if they provide you with a facility for credit. Credit being either a loan, the credit can also be a trade account, a phone bill or a water bill for example, or an electricity account. They are all types of credit because they advance you the services on terms. So other types of credit in a lot of ways are trades and services. They're a form of credit.
but they're not a secured credit. So credit rating usually relates to your secured credit, which is a formal contractual arrangement that you enter into for a service or a term to be provided to you. So credit rating is like this cloud score that we have. Nobody knows how they calculate it. It's always the fun thing. I've been asked for decades, how do you calculate a credit score? Yeah, can't tell you guys. They keep that a secret, but we sort of have a fair rough idea of what they
Trudi Cowan (02:11.052)
Hmm.
Sarah (02:40.153)
do, but I suppose the idea is they keep it a secret so no one can hack it.
Trudi Cowan (02:41.196)
Hmm.
Trudi Cowan (02:44.716)
Yeah. So who tracks these scores for us then?
Sarah (02:48.537)
In Australia we have four different agencies. We used to have less but I think a couple merged and then we had Eelion come in. So we have obviously Illion, Equifax is probably the most well -known one. Then there's Experion, actually it was Experion that came in. Experion and then there's Dun & Brad Street. So...
Trudi Cowan (03:08.236)
Okay, do they all track it in the same way or can you have different numbers with different agencies?
Sarah (03:10.937)
No. Yes, is the answer. I know. Confusing much? Which is why, and we'll talk about it a little bit later, when you have an issue with your credit score or your credit rating, we'll unpack that too. What's the difference? You'll need to actually check all four agencies to see what they say to ensure that you get a clean slate.
Trudi Cowan (03:15.5)
Yeah.
Trudi Cowan (03:26.38)
Thanks.
Trudi Cowan (03:34.657)
And is that because different people report to different agencies or they're just pulling information from different places? Yeah.
Sarah (03:42.137)
Yep, and different creditors, different lenders actually use different agencies as their preferred supplier. So it's standard like supplyment, supplyment, it's not even a word Sarah, supplier terms for like the provision of services for that credit in this instance, the credit rating, the credit file that goes with it.
Trudi Cowan (03:49.356)
Yeah.
Trudi Cowan (04:05.26)
Yeah okay so what impacts on the credit rating? I'm presuming if you don't pay your loan back that's probably going to have an impact but what other sorts of things are we talking about?
Sarah (04:10.425)
LIT
Yeah, so before we go to that I just want to explain the difference between a credit rating a credit score and then an internal bank credit score because they're not the same thing just to confuse us all I know so your credit rating is the one that gets reported to the formal agency It has a score that's attached to it separate to the actual rating. I know confusing So when you pull up a file, you'll actually see a
Trudi Cowan (04:21.1)
Yes.
Trudi Cowan (04:28.076)
I should be.
Sarah (04:42.713)
a rating on a scale and then it will have a separate score attached to it and that will give it's like your risk profile. It's like two ways of looking at your risk profile. The words are interchangeably used when they're talked about because they used to be the same thing but they aren't anymore and that's also as a result of positive credit reporting which came in I think was about five or six years ago now when they changed the way that they report people. So,
with report on people. So it used to be you only were reported on for the negative things that happened. So if you missed repayments on loans or if you defaulted on a credit card and then they decided, that's not fair to the people that pay their bills on time. So we'll now record and report on everything you do on your file with your bank account as well, not just any loan facility. So now you have great people that have always paid their loans on time.
Trudi Cowan (05:14.156)
Hmm.
Sarah (05:41.881)
being impacted by perhaps missing a couple of direct debits out of their bank account. And that has an impact on your credit score, which impacts your credit rating.
Trudi Cowan (05:46.796)
Yeah, okay.
Trudi Cowan (05:50.764)
Yeah, previously they never would have bothered about it if you missed a couple of days.
Sarah (05:55.097)
No, like if you hit your credit card repayment every month, you know, it was a tick pretty much. And now there's all these different codes, ones and zeros and numbers and P's and C's and R's that they use to clarify their legend, as they call it, about the way that you read the credit rating. The other thing to bear in mind is that an internal bank's credit score is not the same thing as what gets reported to a credit agency. It is, yes, still a risk.
Trudi Cowan (06:07.084)
Hehehehehe
Sarah (06:22.073)
Profile score that they create to see whether or not you're worthy to lend to but things that impact a bank's credit score Which may shock you are still things from you know a past lifetime like do you have a home phone number?
Trudi Cowan (06:37.516)
Ha ha!
Sarah (06:39.193)
Do you have an office number? Correct. Right. They haven't come up to date because if you think about it traditionally in the 50s, 60s, 70s, 80s and even the 90s, if you didn't have a home phone, you couldn't afford to put on the home phone. You couldn't afford a loan. Right. So the same things. I mean, they're not as relevant now as they used to be.
Trudi Cowan (06:40.78)
I don't have a home phone!
Trudi Cowan (06:57.5)
Yeah.
Trudi Cowan (07:02.156)
And also you're probably difficult to contact if you didn't have a phone. Whereas now we all have mobile so we're all very easy to contact, phone or email or this other.
Sarah (07:05.721)
How are they going to chase you to get their money back?
Sarah (07:10.585)
but it still impacts your credit score. So if you're over filling in an online form for a lender or for your broker, make sure you fill in all of those details. If you do have a home phone, fill it in. But things like how long you've been at your address and only putting in one address. There's a reason they're asking for three years history or five years history. Perhaps you don't have much money in your savings account, so you don't bother. Put in a dollar, put in $500. It actually impacts your credit score.
Trudi Cowan (07:12.46)
Yeah.
Trudi Cowan (07:16.876)
Hmm.
Sarah (07:39.865)
things like superannuation, life insurance, like your asset pool. A lot of us don't think about, you know, our contents, our super. Most people would put down cars, boats, savings and shares and that's about it. And I used to sit there with clients. So if you're listening, now you know exactly why I was asking you these questions. How much is your super? Do you have any life insurance? What's your business value?
Trudi Cowan (08:01.964)
because this is all impacting on the bank's actual rating of you.
Sarah (08:04.729)
Because I was boosting your internal credit score with the lender to make sure that if it went through an auto assessment process, you didn't receive an auto decline. So important things, it runs off the credit rating as well. So the credit rating feeds into it plus all of their own internal metrics. And that's how they rate you separately as a credit rating. And there are some banks that don't rely on the external credit rating. They only rely on the internal credit rate.
Trudi Cowan (08:17.036)
Mm -hmm.
Trudi Cowan (08:32.652)
Internal one. And I guess that's another reason why I should go through a broker because they hopefully know these things and are asking all those additional questions to try and boost your scores.
Sarah (08:39.897)
Mm -hmm. Mm -hmm. That's exactly right to get you the finance that you actually need because you're playing against the computer, right? Which is like playing against the house. So you've got to try and win it where you can in the right way to achieve the outcomes because we are playing an algorithm game all the time now. And this was one of the first of them that came through that most people aren't aware of. So back to your other question, which was.
Trudi Cowan (08:53.484)
Yeah.
Trudi Cowan (08:59.82)
I'm sorry.
Okay. Yeah.
Trudi Cowan (09:08.716)
Well, it was what impacts on your credit score, but I think we've already actually kind of run through that now.
Sarah (09:10.489)
Mm -hmm.
Well, sort of. Things that impact your credit score on top of what we've already talked about are your phone bills. They are your bank accounts and not paying, even having $1 overdraw on your bank account. They are your trade and supplier accounts. What else have we got that impact your credit score? Yes? Yeah.
Trudi Cowan (09:17.932)
Hmm.
Yeah.
Trudi Cowan (09:29.548)
Hmm.
utilities. I was looking at my own score the other day and saw that there was a utilities check on there just because I changed utilities and therefore there was an inquiry from that so they are definitely checking and reporting as well.
Sarah (09:38.105)
Yes?
Sarah (09:42.649)
Yes. And you've yeah, we'll get to why you should check your credit score and how to check it later. But it's important to look because sometimes you find things on there that are not supposed to be there. And I will tell you about mine that happened three years ago, but I've even had strange ones from clients with fraud. It's a fast. It's the fastest way to find your fraud at the moment is your credit score. So, okay. So well, I suppose we're there then. Yeah. We'll just go straight then.
Trudi Cowan (09:47.5)
when
Trudi Cowan (10:03.948)
Yeah.
Trudi Cowan (10:08.492)
So how do we check our score? That's basically where we're at. How do we check our score? I know I check mine through Equifax. There's a paid subscription that I have that I get a report once a month that tells me if there's been any activity on my account and I can log in and see what my score is. But I know that there's other options other than the paid sort of subscription method.
Sarah (10:28.409)
Yeah. So to access your credit file, to check your credit rating and then your score, you can go to mycreditfile .com .au, which is actually owned by Equifax and they will let you, it's public record, public access. Like you're entitled to see what's on your file. It used to only be one every 12 months, but they changed the legislation because of all these scams coming in. I'm pretty sure it's one every three years, sorry, every three months, unless you've had an issue with your file and then you get to,
Trudi Cowan (10:49.484)
No.
Trudi Cowan (10:53.964)
Yep.
Sarah (10:57.913)
order another check to make sure that the file has been resolved. You can pay for it, yes. And you can, there are so many different websites now that allow you to order your credit file and pay them as a service, but like those, you know, check your business name, registration, scams, well, they're not technically scams, like you, and you don't have to pay for this.
Trudi Cowan (10:59.916)
sure it's been fixed.
Trudi Cowan (11:05.164)
Mm -hmm.
Trudi Cowan (11:13.676)
Yeah.
Trudi Cowan (11:21.932)
It's always best to go direct to the source.
Sarah (11:26.393)
either. You have the right for public access. So the difference is you might need to wait. So it used to take you 10 days to get your credit file for free. Now it's within 24 hours, sometimes with even within the hour. But that used to be the difference. You'd pay for it if you needed it straight away. And so for me, like with a credit license and my insurance, I need to if I'm re -accrediting,
Trudi Cowan (11:41.452)
Yeah.
Trudi Cowan (11:47.244)
Hmm.
Sarah (11:54.137)
or accrediting with a new lender, they're going to ask for my credit file to make sure that I am a fit and proper person ethically to provide services for origination of credit to customers, right? So if I'm bankrupt...
Trudi Cowan (12:06.572)
Mm -hmm. Well, you kind of want your broker to have a good credit rating, don't you?
Sarah (12:11.225)
Correct, exactly the same. Do accountants get checked? Interesting. I think financial planners do for the same reason, like their institutions, their investment firms don't let them air credit unless they've had their credit file checked. But yes, it's definitely a thing in my industry, but it can be in other industries as well. I know that if you're applying for some public service jobs,
Trudi Cowan (12:15.87)
No. No.
Trudi Cowan (12:21.356)
Where is the PM?
Sarah (12:38.521)
They want a declaration of assets and a credit check. Or if you're going to be the general manager of an LGA, a council region, or a head of a department of New South Wales government, again, they want to know that the person that's making the financial decisions is fit for office or position. Mm -hmm. Yes.
Trudi Cowan (12:38.604)
Yeah.
Trudi Cowan (12:48.492)
Hmm.
Trudi Cowan (12:52.236)
Yeah. But as you touched on earlier, it's also really good to check your own credit score, just to check that it's accurate and that there's nothing in there that is, you know, impacting on your score that wasn't actually something that you legitimately did. Or to see if somebody is actually potentially stealing your identity and therefore trying to take out loans in your name without your knowledge.
Sarah (13:05.113)
untowards? Well, I mean a couple of years ago.
Sarah (13:13.561)
Yeah.
Sarah (13:17.657)
Which is what happened for a client a couple of years ago. Existing client of mine, new partner, new fiance, wanted to sell his property, wanted to buy a new place together. It's like, because I'll always ask you, is there, have you got anything on your credit file we need to be worried about? You better tell me upfront. Then if we go to the path of learning, no dramas, lodges application gets declined for an overdue unpaid optus bill. And he was like,
in his partner's name. And I was like, mate, there's something come up on the credit file. The loan won't proceed at this point in time. And he's like, that's she's never had an account. Went to the police, did an investigation, found out someone had stolen her driver's license, got his credit file and her credit file. Someone had stolen her driver's license four years earlier and had opened a heap of telcos and had gone to the nab and opened a credit card.
Trudi Cowan (14:09.036)
wow.
Sarah (14:16.377)
So this is the other thing with your credit score. If you've got a financial institution default, most lenders will never lend to you again. Because if you didn't pay that fine, why would you pay us? Right. I had another client that again, it was only when we did an application that we found out he had an eight and a half thousand dollar bill to vote for that someone and financial planning had stolen his license again. So massive breach for him.
Trudi Cowan (14:16.46)
wow.
Trudi Cowan (14:26.956)
Yeah, why wouldn't you play the next line? Yeah, right.
Trudi Cowan (14:38.54)
Hmm.
Sarah (14:45.593)
And it was only through like our application and me double checking and asking the questions and then lodging an application. And so this is why you need to watch your credit score. For me personally, when I bought my property here two and a bit years ago, I was looking at going through the NAV bank because they were the better option at the time, but then they wouldn't lend me the money that I wanted. So I ended up going to the CBA and I settled with a CBA home loan. And when I re -accredited, because I changed aggregation to astute financial.
Trudi Cowan (15:13.708)
Mmm.
Sarah (15:13.881)
services in so I bought the house in the March of 2022 and I re -accredited to a new aggregator in the November December of 2022 and when I pulled my credit file there was settled home loans for a lender with NAB that for loans I didn't even have on my credit file. So if that had gone if I had done an assets and liabilities and gone to the bank for a new mortgage at that point in time and not disclose them.
Trudi Cowan (15:32.492)
my god.
Trudi Cowan (15:39.404)
Yeah, you would have been.
Sarah (15:41.561)
They would have said that I would have lied on my application and they would have declined because I lied, even though I didn't lie. Nav had incorrectly administered debts to my file and it was a lot of money, right?
Trudi Cowan (15:43.404)
I am.
Trudi Cowan (15:49.292)
Mm -hmm.
Trudi Cowan (15:54.38)
Yep. And so you were able to get that corrected.
Sarah (15:58.873)
Unfortunately, it took me a while, but yes, I did get it corrected and it was a threat to Africa because I was like, but we opened, we opened bank accounts and I was like, yeah, but the loans didn't settle. So the debt shouldn't be there. You need to remove them immediately. So yes, it took me a little bit of time and also I knew what I was doing, but what I'm getting at is check your credit file regularly. I actually have my credit file locked with all of the breaches we've had in the last sort of 12 to 18 months.
Trudi Cowan (16:17.036)
Yeah. Yeah.
Sarah (16:25.465)
My credit file's got a permanent lock on it, which means if someone tries to open an account, they can't. And you can do that. You can temporarily lock your credit file yourself, and then you can unlock it just on, mine's with Equifax, it's locked. I haven't locked it with the other ones, but most of the stuff in Australia goes through Equifax. So I locked it with Equifax.
Trudi Cowan (16:44.396)
Yeah, okay. So if you do have, let's say you have a payment default that's impacting on your credit file, how long does that impact your credit file for?
Sarah (16:54.617)
What is a payment default firstly?
Trudi Cowan (16:57.26)
I paid my bill late and therefore they've reported to the agency.
Sarah (17:02.233)
Right, so it's not just I've paid my bill late. For an institution, a secure creditor to default you, there have usually been months of them chasing you to pay your bill, threatening a suspension, threatening a cutoff notice, and it's usually six to 12 months before they default. They don't say on the 30th of March, you haven't paid your bill and on the 1st of April, send you to a default because it costs money and if they're wrong, they get a fine, right? So often when...
Trudi Cowan (17:13.228)
Okay.
Trudi Cowan (17:25.74)
Yeah. Yep. Okay. All right. So let's say we get to that point then. How long does that then impact me for? Five years. So that's a long period of time if you're... Yeah.
Sarah (17:33.241)
Mm -hmm.
Five years, minimum. Yeah, but I haven't finished. So it's five years from the registration of the default, and then they can still chase you for that money. And say in four years time, they've sent you off to a debt collector, and then the debt collector updates your file to still unpaid. You get another five years.
Trudi Cowan (17:46.988)
Mm -hmm.
Trudi Cowan (17:57.964)
Okay, so I can haunt you for a while.
Sarah (18:03.289)
Yeah, it depends how vindictive the credit agency is. And if the debt from the secured credit has been sold to a really aggressive debt collector, then they can absolutely, because I've had customers like come to me at like four and a half years with a credit card default and be like, well, six months and it's gone. I don't want to have to pay back that bank, that five grand I took out. And it's like, well, sure. None of us really want to pay for the things that we spend, but.
Trudi Cowan (18:19.084)
Hmm.
Sarah (18:31.513)
If you don't pay this default, this is what can happen moving forward. So you need to decide what's more important.
Trudi Cowan (18:34.508)
Yeah.
Trudi Cowan (18:38.092)
But if you do eventually pay, it's then sort of a five year, I guess, waiting period. Yeah. Yeah.
Sarah (18:42.201)
It's five years from the update on the listing of payment, right? So you just have to be aware of that.
Trudi Cowan (18:48.812)
It's an important, I guess, date to know if you are planning on going and getting a home loan or some business finance and you're going to be having credit checks done. If you've got these defaults in the past and you've now corrected your ways and fixed everything up, you've still got this bit of a waiting period before it's going to be rectified on your file. Well, not rectified, but sort of cleared on your file.
Sarah (18:56.601)
Yeah.
Sarah (19:07.641)
Here's the other thing, right? There are credit repair agencies that you can use and if it was genuine or extenuating circumstances, if you were a victim of domestic or domestic abuse or violence and or financial abuse and violence, which is still technically a form of domestic family violence, there are ways for you to actually get your credit file cleaned depending on circumstances and outcomes. And I would 100 % recommend paying for a service to clean up your file.
Trudi Cowan (19:21.228)
Yeah.
Trudi Cowan (19:28.748)
Yep.
Sarah (19:36.249)
in those instances. So one thing if you're a business though, you can use a swift check, which is the company check for business, Equifax offer that. So when I do lending for customers, often like we have a minimum requirement to lodge the loan that there's a $600, sorry, 600 score, a score of 600 for the bank to meet their policy on that. And I also don't want,
Trudi Cowan (19:37.484)
Yes, this is.
Trudi Cowan (19:57.804)
and
Sarah (20:05.145)
the institution leaving. And this is one thing we didn't mention earlier, what impacts your credit score? Multiple applications for finance seriously impacts your credit score. And if you're a home buyer, a residential buyer, if you've got more than say, it's, well, it used to be like three within a six month period, you won't get finance with some lenders, you'll immediately get declined in the higher loan to value ratio. So if you're trying to borrow 95%, yep.
Trudi Cowan (20:11.304)
Yes.
Trudi Cowan (20:27.9)
because they're just going to assume that you've been denied by these other banks so why would the next one take it on?
Sarah (20:34.233)
But like even if you do like, I'll just apply online for that pre approval and see what my borrowing capacity is credit file inquiry. Then, so I had it happen to a client before they got declined because they had done an online inquiry. I had done a pre approval with me and then it was five months for them to buy. So we had to do another pre approval and then the bank did another one for some reason. And it sent them into auto decline.
Trudi Cowan (20:39.788)
That's okay.
Trudi Cowan (21:00.844)
Mmm.
Sarah (21:00.985)
in that LVR bracket and I was able to argue with the bank should never have done the fourth one, which meant it would have met policy. But multiple credit inquiries equals you can't get money in some instances. So it's important to be aware of that. So yeah.
Trudi Cowan (21:10.348)
Yeah.
Trudi Cowan (21:14.9)
So if I'm in business, can I check someone else's score? If I'm going to be doing business with someone, I want to make sure they can pay me.
Sarah (21:21.753)
Yes, you can with Creditor Watch and you can list yourself as a secured creditor on the PPSR as well. And we often advocate for this treaty because especially with
Trudi Cowan (21:28.524)
Yeah. Yes, we do. Especially if you're engaging with really large contracts or you're lending out pieces of equipment or, you know, if there's there's real risk to you there from a financial perspective, it's really worthwhile doing these checks on the people that you're dealing with.
Sarah (21:37.337)
Equipment. Yeah.
Sarah (21:43.641)
The other thing to bear in mind is that if you receive money from a business that goes into liquidation, then it is perceived as a, it is labeled as a preferential payment and the administrator can actually claw it back from you. So even though you did the work and you were entitled to receive that money, you still have to pay it back because you were not listed as a secured creditor, which is why PPSR registration is so important. and by the way, it's...
Trudi Cowan (22:00.652)
Yep.
Trudi Cowan (22:07.276)
Yeah.
Trudi Cowan (22:10.764)
Yeah, and we have talked about that in previous episodes. So if you're not sure what we're talking about, definitely go out and find out a bit more about that.
Sarah (22:14.041)
Yeah.
Speaking of secured creditors, the ATO I believe is a secured creditor these days and is on the wall path around this.
Trudi Cowan (22:25.484)
are a secured creditor, but they're definitely on the wall path around this. And when it comes to what can ruin your credit rating and not paying the ATO is definitely one of those things because they are definitely reporting people to these credit agencies. And they do it with warning. You're told that if you don't pay the bill, we're going to do it. So you have plenty of opportunity to, I guess, engage with the ATO to try and prevent it happening. But they certainly will report you to credit agencies.
Sarah (22:28.985)
Mm.
Trudi Cowan (22:53.164)
if you're not meeting your tax payments.
Sarah (22:56.217)
And your director's penalty notice goes on your personal credit file. So, guess what? Can't get money. You get a DPN? No. Not getting money.
Trudi Cowan (22:59.18)
definitely that would definitely be going on to your credit file. Yes.
Trudi Cowan (23:08.012)
Yeah, and a DPN is really where the business hasn't paid their taxes. The ATO then chases after the directors of the company and so they seek them to be personally liable for that debt. So what are some of the other things that can really just destroy your credit rating?
Sarah (23:25.977)
Closing down your company in voluntary administration, for whatever reason, you decide that you're going to close down this company and often you'll find the administrator that you use tells you it won't affect your personal credit score. It does. In fact, it ruins it. Why? Because your personal credit score has a section that links you to company directorships.
Trudi Cowan (23:45.036)
It does, yeah.
Sarah (23:53.689)
which then means they're going to pull the company file, which then means they're going to say it was liquidated, whether it was voluntary or involuntary, they're going to say it. Now you and I go back and forth on this issue about ways to wind up a company and voluntary administration sometimes can be the smartest way to wind up a company, which is fine. I just want you to know that it can fuck up your credit score.
Trudi Cowan (23:59.628)
I'm excited.
Trudi Cowan (24:05.004)
We do go back and forth on this.
Trudi Cowan (24:18.444)
Yeah, yeah, and there's important to understand, I guess, because there's two options to winding up your business liquidation and then there's deregistration and they have different impacts. So if you are going down that path, it's really important to make sure that you're fully understanding, I guess, the implications of both so that you can pick the best option for you. But certainly liquidation, yes, can impact on your credit rating. So if you're about to go and borrow after liquidating a company, then perhaps that's not the best option necessarily.
Sarah (24:26.617)
Yeah. Yeah.
Sarah (24:34.905)
Mm -hmm. Mm -hmm. And if...
Sarah (24:47.225)
I mean, liquidation will remove potential future liability, but the trade off is an impacted credit score that in most instances, lenders won't touch. Like you would have to have the best reason and get a lender that was prepared to fight for you, which let's be honest is very rare, to have the credit manager accept your voluntary liquidation.
Trudi Cowan (24:51.628)
Mm.
Trudi Cowan (25:04.012)
Hmm.
Trudi Cowan (25:09.676)
Hmm.
Sarah (25:15.961)
as you not just trying to escape your liabilities. Right? So like in a scenario where that may...
Trudi Cowan (25:18.86)
Yeah, yeah, you have to probably be able to show that you had a clean balance sheet before you liquidated and you were doing it for reasons other than not being able to pay your debts.
Sarah (25:24.505)
I was literally just about to say, a scenario where that may work.
Yeah, that'd be the only way you'd maybe get something like that through. But again, you have to have a lender that's prepared to even look at that. And most of them say involuntary liquidation or voluntary, sorry, voluntary liquidation, not credit score decline, because remember, it's an auto score. And you can't turn the score off, like you can't override the score in most instances, and not sorry. So if you're going to get on that path, that's great. Just know that you've got a five year hit on your credit rating for your liquidation.
Trudi Cowan (25:35.916)
Yeah.
Trudi Cowan (25:44.364)
Yeah, auto system.
No.
Trudi Cowan (25:57.292)
Yeah.
Yep. So what else we already talked about not paying your bills on time or at all is obviously going to have a bit of an impact. We've talked about defaults and they're obviously going to have a massive impact on your credit rating. What about? I was just going to say, so what are court judgments?
Sarah (26:01.017)
So yeah.
Sarah (26:12.345)
Defaults can also lead to court judgments, right? Yeah. So court judgments are where the lending institution is really annoyed that you haven't paid them. So first they'll default you and then they'll chase you through the courts for magistrate's judgment. So the magistrate will sit and listen to the conditions of the case and will decide whether or not it's appropriate to list a court judgment.
Trudi Cowan (26:26.732)
Thank you.
Sarah (26:41.753)
from the magistrate's court against your credit file in an effort to have the secured creditor recoup the funds that they loaned or in whatever the circumstances were services might have been provided. Court judgments usually are only because of the costs from that lender or creditor to take you to court. They're usually for like over 20, 25k. Most of the court judgments I've ever seen were like 30, 35k plus. The ones that are under a hundred grand you've really
Trudi Cowan (27:09.004)
Yeah, okay.
Sarah (27:11.737)
pissed off the creditor because it's a lot of money to breathe for barrister to go to court. But yeah, there are some for like 100 150 K that have gone through and here's the other thing, right? Like I said it earlier, but if you if you so you can get finance for yourself personally if you've gone into voluntary liquidation, but the only lenders that will give you that money are your subprime lenders that are for bad credit. Like this is what
Trudi Cowan (27:13.26)
Yes.
Yeah.
Trudi Cowan (27:37.452)
you're going to charge a much higher rate.
Sarah (27:39.737)
This is what a bad credit file looks like. People with defaults, people with... So there's a difference between positive credit reporting and a low credit score and people with bad credit file, right? Because a bad credit file will also affect your score, but it will have defaults, missed payments, it will have court judgments. Yeah.
Trudi Cowan (27:42.828)
and
Trudi Cowan (27:49.452)
Yeah.
Trudi Cowan (27:57.452)
Yeah, that history of your lending isn't it? And a bank is going to look at that history and go why would I lend to someone who hasn't previously been meeting their debts when they followed you.
Sarah (28:05.177)
Yeah, and they'll charge you 5 % to 7 % more than the average major bank to do so. Yeah.
Trudi Cowan (28:09.74)
Yeah, because then that's covering the risk, isn't it? If I charge more interest, then I'm covering more money so that if I do have some losses in terms of they don't repay everything, well, at least I've made up for it a little bit with some of the interest. That's where they're coming from. Yeah.
Sarah (28:20.537)
It's a risk for rate profile, right? Trudi doesn't pay her bills on time. I know Trudi doesn't pay her bills on time. And Trudi comes to me and asks me to borrow a thousand dollars. Says, oh, but I'll pay you interest on it. Am I going to give her a thousand bucks just to cause or I'm going to give her an interest rate that actually compensates me for the amount of money? Trudi does pay her bills on time, by the way, for everybody that's listening, just in case. Um.
Trudi Cowan (28:27.276)
Hahaha!
Trudi Cowan (28:32.588)
Mm.
Trudi Cowan (28:41.676)
for that risk that you're taking.
Hahaha!
Sarah (28:49.113)
But like, why would you give money to someone that you know? Like you think about it as if it was you lending money. Okay, there are circumstances where you do give money, but you, they're called taking risks and you don't give them in the instance that you expect to. Yeah.
Trudi Cowan (29:00.972)
Yeah, and you want to get compensated for that risk and that's what the banks are trying to do. And as a business owner, if you are lending out equipment, in effect you're doing the same thing. So you should also be doing the same sorts of checks to make sure that you're lending to people that is an appropriate level of risk for you.
Sarah (29:11.993)
completely. Yep.
Sarah (29:17.849)
Yep, plumber mate's got five -ton excavator, he's gonna lend it to chippy mate to do some landscaping in his backyard. Definitely be checking credit rating. I know, where do you draw the line between personal relationship and business? It sucks, but business is business, your assets are your assets. If you've got debt on that machine, your mate rolls it, smashes up the machine, isn't covered because he's not qualified to use it.
Trudi Cowan (29:31.372)
Business is business.
Sarah (29:43.961)
You now have a debt on a machine that you can't repay because you can't bring an income in from the machine. You're correct and your personal credit file is now on the line. Not to mention you've got debt owing to a lender that you need to repay and you need to find a way to repay it. And they may come after your house to do so depending on what personal guarantee you signed in your loan agreement.
Trudi Cowan (29:47.98)
Yeah, and no agreement that he needs to compensate.
Trudi Cowan (30:06.988)
So I think my biggest takeaway from this conversation is if you've never checked your own credit rating, go and do it. If you've never checked your business credit rating, go and do it. And if you are lending money or equipment to other businesses, then you should be checking your services or substantial services, yeah. Large contracts, if you're engaging in large contracts, then you should also be checking the credit ratings of those businesses that you're dealing with.
Sarah (30:11.257)
Yes.
Sarah (30:21.113)
Or services, right? Yeah. Large, large contracts. Check that. Yeah.
Sarah (30:31.833)
100 % spot on spot on well guys we'll wind it up there no we'll wind it up there that's enough I think they've heard enough of me today
Trudi Cowan (30:34.828)
Any other questions here?
Hahaha!
Sarah (30:42.297)
We've got some cool episodes coming up in the near future but as always if you would like to make a suggestion please guys just reach out, shoot us a DM on Instagram. We'd love to hear from you as to what you'd like to hear about more moving forward. Yeah, that's it. That's where we're at.
Trudi Cowan (30:59.596)
Thanks everyone.