It is almost impossible to borrow from a mainstream lender like a bank f you don’t have a credit rating, don’t own a car or house and your income is low or solely from government benefits.

A number of major banks have separately entered the low-income loan market, offering loans of up to around $3000 to enable people to borrow and also to build up a credit rating.

In the past, so-called pay-day lenders made their presence felt in this area, but this was often a debt trap for those with little spare cash. Pay-day loans – marketed as cash to tide you over until the next pay day – could involve enormous rates of interest, as much as 48%, making it difficult to repay and often making the borrower’s financial situation worse.

Now ANZ and NAB both have low-income loans on offer through their relationships with separate charity organisations.

ANZ announced in late May it had joined forces with the Brotherhood of St Laurence to provide a program called Progress Loans, which will give people on low incomes access to loans between $500 and $3000 to pay for essential items. Three loan officers funded by ANZ will be at the Brotherhood’s offices at Fitzroy and Frankston in Melbourne to guide prospective borrowers through the loans process.

Each loan will have a $40 approval fee and the annual interest rate is 12.7%, which ANZ says is in line with rates for most unsecured personal lending. It plans to charge this rate to make the program self-sustaining.

The Brotherhood and ANZ in Australia will pilot the program for six months, after which it may be extended to more partners and states.

To be eligible for a Progress Loan, applicants must have a Health Care Card or Pension Card issued by Centrelink, have lived in the same residence for more than six months and be up to date with utility bills and rent.

Tony Nicholson, executive director of the Brotherhood, said in a press release that many people on low incomes had traditionally been excluded from affordable mainstream financial services. They often had to rely on very expensive forms of credit or simply go without household items that most Australians take for granted. “Families we work with survive without a fridge or washing machine, using an esky to keep food cool and visiting the laundromat on a daily basis,” he said. “Over the space of a year this adds up to more than the cost of a personal loan.

“With Progress Loans we will be able to assist many of these families to borrow money via a mainstream credit market, in a way which is sustainable and protects them from exploitation. Our research and experience indicates that Progress Loans will help more people on low incomes build a base of assets, take more control of their financial circumstances and overcome poverty traps associated with financial exclusion.”

The research also showed that people on low incomes were generally good at repaying, with a default rate of just 0.9%.

National Australia Bank in April this year expanded its low-interest loan offering, which is in partnership with the Good Shepherd charity organisation. The loan program is called StepUP and is offered in NSW, Victoria, South Australia and Western Australia.

It lends amounts of $800 and $3000 at 6.99%. It is seen by NAB as a break-even product.

The StepUP loan is also seen as a way of getting people used to making repayments and building confidence that they can do this. It is seen as bridge between NILS, a no-interest loan scheme run by Good Shepherd, and access to mainstream credit. NAB is also considering a low-cost insurance product and a low-interest loan for basic business enterprises.

Getting a loan these days is not a big issue.  Almost everyone  will apply for a loan at some stage in their life, be it a mortgage, a car loan, a personal loan or a credit card.

Building societies and banks always reserve the right to refuse credit and do so regularly. Such a decision can be based on any of a number of criteria. Unemployment or bankruptcy are the two big black marks but missing loan payments, holding overdue accounts, exceeding credit limits or applying for too many loans at once can also be held against you.

Generally though, banks love lending money because that’s the way they make money, so even a bad credit rating doesn’t necessarily mean you will be refused a loan. In many cases, it may just affect the interest rate a financier charges you.

In the same way as car insurers charge high premiums to people with a poor driving record, financiers will often lift interest rates to reflect the risk of the borrower.

Should the interest rate a financier charges be too high, you should consider carefully whether the cost of the money is worth the purchase of the product. It may be sensible to turn the tables and be the one to refuse the credit.

Who will banks lend to

Many people mistakenly believe they need a credit rating in order to be able to borrow substantial amounts of money. This is not true.

A person who has never borrowed is more likely to be offered credit than someone who has already proved themselves a bad risk. The main issue for financiers is individual’s ability to service the loan.

A strong employment record with a reputable company is regarded favourably. Another major factor financiers consider is assets. If you have never had a loan in your life but have assiduously saved money, a bank will be only too glad to lend you money against your assets and your savings record.

Problems with gaining credit tend to arise for the young who have not had a chance to save, those who have aged without managing to save, those with low incomes, the unemployed and those who continually default on existing borrowings.

Personal credit files

If you are well employed with a strong savings record and are still refused credit, you may wish to gain access to your credit file.

Most people have a credit report that is held with one of Australia’s two largest credit reporting companies, Veta Advantage and Dunn & Bradstreet.

Should you default on a loan payment or fail to pay a bill on time, you may be ”dobbed in” by the credit provider to a reporting company. Your name, address, date of birth, the number of inquiries to take out credit, your reliability in repaying debt and other relevant details will be forwarded to the credit reporter for lodgement.

Your file may contain information on court judgements and summons, tenancy information, insolvency information and directorship information.

When you apply for a loan, financiers pay a fee to the reporting companies to access your credit data. Financiers have different lending criteria and scoring systems for lending offences. They add the instances of defaults and inquiry and match it against a 40-point checklist which profiles your sex, gender, marital status, income and occupation.

By law you are allowed free access to this file, which will be posted within 10 days of your query. Alternatively, you can check your Veda Advantage file online for a fee of $27 at www.mycreditfile.com.au. You can even pay Veta Advantage a fee of $40 per year to receive alerts regarding changes to your file.

Credit reports can be wrong

The information on credit files is usually correct, but problems can occur and you have every right to correct them. Most are easily fixed and include:

• Errors. The injured credit provider may make an administrative error when filing the report to the credit reporter. For example, it may be that you have already paid an account but their systems have failed to recognise it.
• You have applied for several loans in a short period. This behaviour has the effect of triggering back-office warning systems as it may be a signal that you are in financial difficulty.
• Identity fraud. Identity fraud costs $2.2 billion a year. Of all the credit rating issues you are likely to confront, this is the worst scenario and can take longer to fix. It happens when someone steals your identity and uses it to take out loans they aren’t repaying.

Correcting errors in credit files

Nearly all of these errors can be fixed within a month by taking the following steps:

• If you have an overdue account notice on an account that has been paid, ring the injured credit provider listed on your credit file, quote the reference number on the file and ask them to notify the credit reporter of the error.
• If you have been accused of failing to pay an account which is not yours, again contact the credit provider, cite the reference number and they will investigate it for you.
• If you are disputing an overdue account with a credit provider, full details of the dispute can be forwarded to Veda Advantage, which will result in the file being marked ”disputed” until the matter is resolved.
• If you have been the victim of identity theft, contact the credit reporter and the police. Processes are in place to deal with these issues and the problem can usually be resolved within 30 days.

Rebuilding your credit rating

Don’t despair if your credit rating has taken a knock. As noted above, banks love lending you money and are more than happy to lend to a reformed defaulter. One way to rebuild your credit rating is by regularly paying bills and credit card payments. A positive change in employment circumstances will also be viewed favourably.

Do not take on more debt just to try and re-establish a credit rating. Taking on more debt is self-defeating if you can’t repay it. It will only further damage your credit rating and cost you money.