How credit works 1: what you need to know when applying for a credit card

When applying for a credit card, there are a whole host of factors that will influence the assessment process and the eventual outcome.

Credit providers – like banks – look at the three C’s when they receive an application to help them make a decision – Character, Capacity, and Collateral.

* Character – This is key for credit providers, and can even influence the interest rate the customer is charged. The main question trying to be answered is, do we think this customer will repay the loan or balance on a credit card?
* Capacity – Credit providers have a commitment to regulators to ensure responsible lending. They need to prove that the customer afford the new credit without putting them into difficulty. Approving credit for someone that cannot afford it, is not in the interests of anyone
* Collateral – This won’t factor into unsecured debt, like credit cards, but a credit provider may assess what security the customer can provide. This could be a house, vehicle, cash or other assets.

What happens after I apply for a loan or credit card?

All credit providers will have a different process, but the main steps that they take are:

1. Assessment: They will assess the information provided, how much the customer earns, where they live, where they work, what assets & liabilities they have. If the customer is applying to a credit provider that they already have a relationship with, they may not need to provide as many details here.
2. Credit Check: The credit provider will then pull a credit file from one (or more) of the Credit Reporting Bodies (CRBs) in Australia who are Veda, Dun & Bradstreet and Experian.

This file is an important piece of the puzzle. It details:

* Credit applications the customer has made over the last 5 years,
* If they have defaulted (not repaid for at least consecutive 60 days) on any credit obligations,
* Detail public record information (bankruptcy, court judgements).

3. No blacklist: A common misconception is the CRBs hold a “blacklist”. This isn’t the case. It is simply a record of what has happened with your credit file over time. Each credit provider has different rules for what they will accept or decline in a credit file.
4. Decision: Credit providers then merge the information provided through the application with the credit file data and any data the credit provider already holds on the customer, to accept or decline the application.

Out of these steps the key is the character assessment that usually happens through application scoring.

What is Application Scoring?

Application scoring (aka credit scoring) is a statistical model approach used by credit providers to quickly assign a risk level to customers.
This score will help a credit provider to understand if they want to approve or reject the application. If a customer is approved the application score will still influence other factors, such as credit limit for a credit card or interest rate for a personal loan.
Application scoring is different for all credit providers and will differ by lending product (credit cards, personal loans etc..). Although similar approaches are taken to build the application scoring by credit providers, no two scorecards are the same.

A hypothetical scorecard for an imaginary customer:



Number of Enquiries last 12 Months

0 enquiries


1-2 enquiries


3-6 enquiries


7+ enquiries


Number of Unpaid Defaults

0 unpaid defaults


1 unpaid default


2+ unpaid defaults


Time Since Last Personal Loan Enquiry

0-7 days


8-30 days


31-365 days


366+ days


Scorecards work by taking all the data that can be gathered by the credit provider and allocating points based on each piece of information.

What can’t the credit provider use?

Credit providers are not permitted to use any factors that would be deemed to be discriminatory – e.g. age, gender, race, religion – in their assessment.

What about Capacity?

It is important for credit providers to ensure they are lending in a responsible way. They basically ask themselves can the customer can afford the new credit facility? Do they have enough income each month to cover all their rent/mortgage, living expenses and existing loans? Should they reduce some credit card limits or close them altogether?
These will be factors the credit provider will look at. Some examples might include:

* If a customer has credit card limits totalling $85k that they’re wanting to keep, this will need to be factored into a credit assessment.
* The credit provider will factor in the minimum monthly repayments for the fully utilised credit limit (e.g. $85k outstanding balance) which could be as much as $2,550 per month allocated to credit card repayments.
* Even if the credit card is paid out in full every month the credit provider will likely take the scenario in which is the credit card is maxed out and the customer is making minimum repayments.
* A customer can be a low risk from a character assessment, but if they cannot afford the new credit facility the credit provider won’t be able to approve them.

How long does all of this take?

Once an application is submitted, most credit providers will give you a response in under 60 seconds for a credit card or personal loan. The application may be referred by the decision system to a person for review to decide whether it will be accepted or rejected.

Once accepted, identity or income verification steps may add some time to the process. Some credit providers (like MoneyPlace) allow customers to connect their bank accounts up to their application which typically means the customer doesn’t have to send in payslips.

A note on MoneyPlace

When you get a “rate estimate” through MoneyPlace this will not affect your credit score.

Why? We use data to estimate your interest rate. When you progress to the official application stage of a loan, this is when your credit file will be affected.

Read the rest of the “How credit works” series:

2. How loans and credit card applications impact your credit score
3. The upcoming changes in the credit reporting system
4. Key tips for getting a loan in Australia

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Disclaimer: This article has been prepared for informational purposes only. The information in this article is general in nature and has not been prepared with your personal circumstances in mind, so please consider if any advice is appropriate to you before making any financial or taxation decisions.

Money Place AFSL Ltd ACN 601 061 438 holds Australian Financial Services Licence 466327 and Australian Credit Licence 466327.