Personal loan borrower credit ratings boosted during COVID-19

The research, undertaken by global data analytics business Equifax in partnership with personal loan provider Fair Go Finance, was commissioned after the lender unexpectedly recorded several months of positive repayment behaviour by its customers when COVID-19 first appeared.

It therefore sought to understand how COVID-19 was impacting personal loan borrowers’ credit scores over time. (Because Fair Go Finance went live with comprehensive credit reporting in October 2019, its borrowers’ repayment behaviour – including positive behaviours – directly influences their credit score).

Conducted using a sample of 1,662 consumers (excluding those with special events such as insolvency) that opened loans with Fair Go Finance during January and February 2020, the research measured performance from origination through to 28 June 2020.

Similar to Fair Go Finance’s initial observations, the report found that repayments and credit ratings generally improved over the first half of the year, despite the ongoing coronavirus pandemic.

Sixty-eight per cent of individuals who took out personal loans pre-COVID increased their credit rating during the pandemic, the survey found.

This was particularly true of borrowers who had not previously utilised comprehensive credit reporting (CCR) data, with 78.5 per cent of this segment increasing their score by an average of 125 points.

The average credit scores of consumers increased from 496 (with 50 per cent of scores between 401-589) to 518, (with half of the of scores between 434-626).

The average change in credit score overall was +22 points; however, for those that increased, the average increase was +88 points.

Individuals with previous adverse credit history (79 per cent) increased their score by an average of 105 points.

The customer research also found that repayments on personal loans were boosted by 30 per cent in April and July, through a combination of lower discretionary expenses and access to funds via JobKeeper or superannuation accounts.

‘100 points on a credit score means that we see a customer as half as likely to default on their loan’

Speaking of the changes, Fair Go Finance CEO Paul Walsh stated it was “clearly evident in the data that the positive repayment performance is a result of government stimulus and policies like JobKeeper, access to superannuation and reduced household spending during COVID-19”.

He added: “Through the eyes of a lender, 100 points on a credit score means that we see a customer as half as likely to default on their loan, so to see customers getting a boost of up to 125 points, it’s a real buzz for staff and our customers.

“This translates into access to cheaper credit and typically lower repayments either with us or other lenders.”

The CEO noted that positive repayment behaviours were particularly beneficial to its customers’ credit scores, as the company’s involvement in the CCR regime means that these positive behaviours increase a borrowers’ credit score overall.

“In this study specifically, 78.5 per cent of people without initial comprehensive credit reporting data increased their score by an average of 125 points,” he outlined.

Speaking on behalf of Equifax, Kevin James, general manager of advisory and analytics consultancy services, said: “The research conducted with Fair Go Finance shows the benefits of CCR in providing a more balanced view of an individual’s credit history, enabling consumers to be considered for lower-cost credit facilities.

“It’s great to see Fair Go Finance using this data to understand their customers and to reward them in the future. Customers who show a positive change in their credit scores can access lower costs on their future personal loans with the lender.”

The partnership between Fair Go Finance and Equifax is said to continue over the coming months, and the lender has said that further research will be conducted to understand the changes on credit scores from here until end of March 2021 (as JobKeeper is gradually reduced).

The research echoes findings previously released by digital credit reporting agency CreditorWatch, which indicated that, despite COVID-19 and its associated economic impacts, the number of businesses entering administration has been at low levels since April 2020.

According to CreditorWatch, the number of businesses defaulting on payments fell by 13.2 per cent in July and average days to payment decreased by 7.6 per cent across all sectors.

CreditorWatch CEO Patrick Coghlan expressed concerns that this could mean that thousands of companies that would have ordinarily gone into administration have avoided doing so because of government stimulus  measures, meaning that creditors and policymakers need to brace themselves for a sharp market readjustment when the government support ends.

[Related: Australians wipe $2.45bn off credit card debt]