By Phil Ringuet
With interest rates on the way back up, there’s no doubt some households around the country are starting to do it a bit tough. Coincidentally, some big changes kick in on July 1 when it comes to recording financial hardship arrangements.
In the past, if you were unable to meet your loan repayments, you could enter into a financial hardship arrangement with your lender and it couldn’t be reported in official credit reporting systems.
In many cases, the repayment history in your credit report would show a blank month or possibly a missed payment during the hardship arrangement period.
Neither of these two approaches told the full story about your credit history and that a financial arrangement had been agreed upon with your lender.
So what’s changed from 1 July 2022?
Ok, so from July 1, the credit reporting system will introduce financial hardship information into credit reports.
This means that if you enter into a financial hardship arrangement that reduces your monthly loan repayments, then for the next 12 months your credit report will show:
– that you were current and up to date with your payments for that hardship month, provided you made your reduced payments on time; and
– a flag alongside your repayment history information for the hardship month, indicating a special payment arrangement was in place.
The flag in the credit report will be referred to as ‘financial hardship information’ and can take two forms (A or V) depending on the type of arrangement:
A indicates there was an arrangement for the month that temporarily deferred your repayments (which will need to be repaid later or be subject to a further arrangement).
V on the other hand means the loan was varied that month to reduce your repayments.
The good news is that the financial hardship information flag will only stay on your credit report for 12 months, whereas regular repayment history information stays for 24 months.
So is all this good or bad news?
Well, like most changes in life, it comes with pros and cons.
The changes are intended to give you the ability to ‘protect’ your credit report if you experience financial hardship – in no way are they designed to exclude you from applying for credit.
However, a financial hardship arrangement flag may prompt prospective lenders to make further inquiries to better understand your situation.
If, for example, the hardship arose because of a temporary reduction in your work hours, but you’re now back in stable employment, in most cases it shouldn’t cause any major issues for your loan application – especially if we can provide proof to your prospective lender.
Additionally, hardship arrangements can stem from a natural disaster that’s completely outside your control, such as a flood or bushfire, which can be explained to a lender.
Importantly, the financial hardship information cannot be used by a credit reporting body to calculate your credit score, whereas regular repayments that are missed outside a hardship arrangement will impact your credit score.
Having trouble meeting your repayments? Get in touch
As you’ve probably noticed, the Reserve Bank of Australia has been aggressively raising the official cash rate in recent months, which means your monthly repayments would most certainly have gone up if you’re on a variable loan rate.
And if you’re on a fixed loan rate, you also need to think ahead to what your monthly repayments might be when the fixed-rate period ends and reverts to a variable rate.
So if you think more rate rises may soon strain your monthly budget, now is a good time to start putting extra money away into an offset or savings account to build up a buffer.
Other options we can help out with are refinancing and debt consolidation, both of which can help reduce your monthly repayments.