Credit reporting in Australia is getting a makeover.
In a move to help credit providers get a "fuller picture" of an individual's credit history, new reforms to the 1988 Privacy Act will allow financial institutions to see a more detailed record of your past relationship with lenders.
These changes will come into effect from March 2014.
So what exactly will be included on your credit file from now on, and how will these changes affect the way lenders make decisions?
Comprehensive credit reporting
Since 1988 The Privacy Act has only allowed for a negative credit reporting system in Australia. This means that when lenders are considering you for a loan they're only able to see the negative listings on your credit file, and don't have any positive information to weigh it up against. Now, changes to the Privacy Act 1988 have allowed the government to introduce a comprehensive credit reporting system that's more in line with the systems currently in the UK and USA.
Important changes to credit reporting
Merrilyn Mansfield: Financial Advocate, PRINCEVILLE Credit Advocates
What is changing?
Your credit file will now include five new fields of data that will show your Repayment History Information (RHI) to lenders. RHI is information that lets lenders know whether you have met your payment obligations by listing the payments you make and fail to make. The amount of these payments isn't disclosed, only whether or not you make them.
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The five new data fields are:
- The date you opened an account
- The current limit of that account
- The nature of the credit account
- The date the account was closed
- The account payment history
How do these changes affect you?
Negative listings could be negated by positive repayment history
Previously, the only information that was stored in regards to repayment history was when you didn’t make a repayment and this was listed as either a default or clearout. While this information will still be included, all the repayments you make for each account will also be included. This might lessen the effect of these negative listings on your credit file because it will allow lenders to get a better idea of your reliability as a borrower.
Risk adjusted model could change the way lenders offer loans
The risk adjusted model could also mean people could receive higher interest rates, rather than the previous model where this only happened if they had bad credit. For instance, borrowers will be exposed to higher rates being offered if they have high credit limits which they don’t use or can’t afford in the eyes of the lender. This could potentially lead to more predatory lending. In the US, banks currently advertise rates based on ‘excellent credit’ which is a practice which could be adopted by Australian lenders.
Some may find it easier to access credit
People with a limited credit history, such as young people who have not had a credit card or even small businesses will have more detailed information collected on their credit file and may find it easier to access credit. Some borrowers, however, may find it more difficult to access credit because the new reporting system will allow lenders to see if you have more credit than you can afford.
More definitions of a "poor/good credit history"
The increased amount of information available will allow lenders to make better informed decisions because they are able to see a better picture of your finances. This may lead lenders to change their definitions of ‘poor’ and ‘good’ credit history because they are able to base their lending decisions on more factors.
What could come in later
Credit utilisation rates: if Australia adopts more features of credit system models in the US, Japan and Hong Kong where lenders can see how much money is in your bank account, meaning lenders could take into account credit utilisation rates (the rate of your available credit to debt) which could ultimately encourage lenders to increase their credit limits.
Credit utilisation could also encourage borrowers to spread their debts over multiple cards rather than pay off their debt.
Credit files could contain details about rent and utility bills in the future, and this could be used by providers and landlords in the application process.
Interest rates: The range of rates available in the Australian market could widen, currently the lowest variable rates start at 4.49% p.a. for loans.com.au up to almost 9% p.a. for low documentation home loans
Privacy and marketing practises: Lenders may use the increased amount of data to market specific products to borrowers, and with more data being captured there is more risk of security breached and concerns over accuracy.
What borrowers should do
Keeping a clean credit file now goes beyond just paying back your loan. Here is what consumers need to do now these changes are coming into effect:
Pay your bills on time: Any positive repayment history can offset negative marks on your credit file and may help you access credit later on
Focus on reducing your debts before increasing your credit: Doing this can not only help get your application over the line, but will leave you in a better financial situation before you take on more debt.
Don't open and close your accounts too often: If you do this lenders may view you as an irresponsible borrower.
Order a copy of your credit file and check for errors: By checking your credit file may find errors which you can rectify, and you will also get a better understanding of your current financial position.
Consumers can also seek the services of a credit repair specialist to help them work through their credit file and possibly remove negative marks on their file. One such company is Credit Repair Australia. Fill out the form below to begin a no-obligation discussion with them about your file.
Although the reforms come into effect on Wednesday, some lenders may take a while before they start to collect or choose to report this information, which leaves consumers time to work towards cleaning up their credit file.
Check your credit score
With these new credit reforms coming in it’s more important than ever to get an idea of the information on your own credit file, which includes your credit score. Your credit score is used by lenders to calculate the risk they will take on by lending to you. The score is determined using the information on your credit file. When judging your creditworthiness a lender will use both your credit score as well as information in your credit file.
You should be aware of all information available to lenders when determining your risk level and you can do this by checking your credit records. If you would like to check your credit score and credit file you can order a free copy from Equifax or Dun & Bradstreet. Either of these credit agencies can send you a copy of your report free of charge in ten business days, or you can pay a fee to receive it sooner. To find out more about your credit file and credit score, you can read about it here.
How far back does my credit history go?
Different types of credit information are kept for different periods of time. Any information regarding defaults and records of payment of the default will stay on your credit history for five years, and your repayment history will stay on your credit file for two years.
Do financial institutions already collect repayment history information?
Yes, financial institutions have collected this information about borrowers for their own use.
Who can obtain a copy of my credit file?
Only you and licenced credit providers who you've applied to borrow from.