Credit reporting changes will soon be in effect across the board, so what’s changed and how will it affect you?
- Why are credit scores important?
- What is negative credit reporting?
- What is comprehensive credit reporting (CCR)?
- When is it effective?
- Will my credit score change?
- Pros and cons of CCR
Your credit score is an incredibly important tool and one of the defining factors in whether you’ll be approved or rejected for a loan or credit card.
Despite this, research from Credit Simple released in October found a staggering 65% of Australians didn’t know their credit score. With the introduction of Comprehensive Credit Reporting (CCR), your credit score can be positively impacted for the first time, potentially giving you a financial leg up.
So what is CCR and how does it work? This yarn will try to break down Australia’s new credit reporting system and explain how you can make the most of it.
What are credit scores and why are they important?
A credit score, or credit rating, is essentially a numerical representation of your trustworthiness as a borrower. The number/score will be between 0 and 1,200 depending on which credit reporting agency is used.
Credit scores are incredibly important as lenders and credit providers will look at this score to help them determine:
- Whether they’ll lend you money
- What interest rate you’ll pay
- If you can afford to meet the repayments
Bad credit scores generally make you more likely to be rejected for credit, as they are an indicator that an adverse event (such as bankruptcy or default) is more likely to occur to you in the next 12 months.
Credit scores aren’t an overly complex topic but there is a lot of information associated with them which this article won’t get into. Check out this article for a full breakdown of credit scores, including how you can improve yours.
What is negative credit reporting?
Negative credit reporting is the older credit reporting system that Australia has been using (and many lenders still are). Lenders decide to approve or reject potential borrowers based only on whether the applicant has negative financial events in their credit history.
These negative events can include:
- Making late repayments on loans and credit cards
- Missing repayments entirely
- Applying for too many loans and credit cards at once
- Rejections for loans and credit cards
- Missed bills that are more than 60 days overdue ($150 or more)
- Not paying off a balance transfer by the end of the promotional period
What is Comprehensive Credit Reporting?
Comprehensive credit reporting, or positive credit reporting, provides a more rounded picture of a potential borrower’s capabilities by taking into account positive financial events as well as negative. It does so by changing the type of consumer credit information that can be collected by credit bureaus (like Equifax) and then used by lenders and credit providers (like big four banks).
Positive data that can be included on credit reports are:
- The date accounts were opened and closed
- Credit limits
- Your usual repayment amount on a credit
- Frequency of repayments
- Credit type applied for
- Up to 24 months of repayment history
That last point is important, as it allows people who have suffered from adverse financial events like bankruptcy to potentially recover from this a couple of years down the track. Furthermore, repayment history information can only be provided by and shared with licensed credit providers, which doesn’t include telco or utility companies.
So if you missed a Vodafone bill, or the lights went out at your place because you didn’t pay Energex, don’t fear, it won’t be on your credit report under CCR.
Kevin James, CCR spokesperson for credit bureau Equifax, told Savings.com.au the reason CCR is such a game-changer is the increased visibility for lenders, which in turn can assist borrowers.
“I think there’s a number of other factors (that make CCR a game-changer), but first and foremost, it’s the visibility to the lenders of nondisclosure,” Mr James said.
“About 35% of loans prior to CCR had some form of nondisclosure and that included accounts or credit card accounts that may have had a zero balance, but they were still able to be used and opened, which were not being declared. So it was very difficult for people to make a responsible lending decision when they weren’t aware of the full picture of what those liabilities looked like.”
“The second part is it allows the lenders also to see the total credit card debt, not just the main borrower debt. You can see how many you’ve got and what the liabilities are on those cards on a monthly basis.”
When is CCR effective?
Not that you’d know it, but CCR has been in effect since 12 March 2014, when changes to the 1988 Privacy Act were amended to include comprehensive or positive data. At this point in time, it was completely optional for lenders and credit providers to use CCR.
Lenders weren’t quick to take up CCR; Equifax reported that as of April 2017 only 24% of lenders were sharing data. This was due to larger lenders believing that the data they held was valuable and making it publically available would allow smaller lenders to steal their customers by tailoring products.
Another reason is it simply took a huge amount of work to report data to credit bureaus publically, so sticking to the status quo was easier. To get lenders on board, then Federal Treasurer Scott Morrison announced on 2 November 2017 that participation in CCR would be mandatory for the big four banks.
This process has been happening slowly since then but as of 30 September 2019, the big four are now sharing 100% of their credit data publically. Only the Big Four was mandated at the time, as around 80% of all mortgages in Australia are issued by one of the four institutions. The government assumed that to stay competitive, smaller lenders would also have to adopt CCR.
Equifax estimates that currently approximately 85% of all accounts have been loaded into CCR bureaus.
Starting from 1 April 2020, large Authorised Deposit Institutions (ADIs) such as Macquarie, HSBC and CUA will also be mandated to adopt CCR, with a deadline of 30 June 2021.
Will my credit score change?
Short of making a blanket concrete statement, it’s quite likely your credit score will change under comprehensive credit reporting. Whether that’s an improvement or drop is dependent on whether the new information made available to bureaus is positive, like on-time repayments.
Mr James said there have been far more improved scores than not.
“If it’s good you’re going to be seeing a real uplift in the scores for borrowers because you’re actually getting all the credit reporting coming through on your repayment history, on the balances of your credit cards and how you pay it,” he told Savings.com.au
“In saying that you’re also seeing a downturn, but the uplift is about 37%. The downturn is about 15%.
“There’s a net uplift on it from behaviour scoring where you can actually see how the people are maintaining those accounts across all the liabilities.”
Pros and cons of comprehensive credit reporting
What are the positives of CCR?
Some of the immediate benefits borrowers will see as a result of CCR include:
- Positive behaviour being recorded, like on-time repayments over the past 24 months
- People who have very little credit history will now have more information on their file, making it more likely for lenders to give them credit
- Credit scores will become more accurate, as a result of more information and a more complete financial picture
- Rare negative events, like accidentally (or not) making one late repayment, won’t have such an adverse effect on scores
Mr James said that we should also see an increase in financial literacy for everyday Australians.
“There’s a whole educational program that’s now going with the CCR data that’s actually coming through. I think what you will find is previously no one knew what their credit score was or no one really bothered about it or it was more around I need to keep my credit file clean,” he said.
“Rather than now it’s a case of how do I get a better credit score, so you’re seeing that shift in mentality starting already even though it’s in its infant stages.”
Mr James predicts there could be a drop in interest rates as a result of this increased financial literacy.
“You’re going to see a lot of pricing pressure come through as Australians understand what their score is and how good these scores are. You’re going to see them start to compete now because they’ll know what their worth is and what prices they would need to pay.”
He also believes there’ll be a shift in lender behaviour.
“We will have a lot more frictionless approvals for those that are not struggling with their debts and their full liability exposures coming through. You’ll see banks and lenders automating a whole heap more now because they are starting to utilize that data.”
What are the negatives of CCR?
If you’re a borrower who pays their bills on time and has a good credit history, it’s highly unlikely that you’ll be negatively affected by CCR. In Equifax’s words, it’s a rare financial overhaul that has few downsides to it.
However, the main negative currently lies in the not-yet-100% market participation. It works so that to gain CCR data, a lender must give out their data also.
“I think the negative part if you want to call it out is the risk and adverse selection,” Mr James said.
“What you’ll find is where you’ve got third-party introducers where lenders are not using CCR data, they’ll end up with adverse selection.
“So whereby they know that somebody with a weak payment history is not going to get approved by lenders, they’ll send it to somebody who’s not in the CCR movement.”
With 85% of accounts already in the CCR system, and government-mandated targets to further this percentage, the window for this negative is quickly closing.
Savings.com.au’s two cents
With comprehensive credit reporting, your credit score is in your hands. Negative credit reporting meant that you basically could never make a mistake without it sending your score downwards. Now, simply being a good borrower can improve your score.
Keep on top of your credits, actually know what your score is (!!!) and pay your bills on time. These small things all have an impact on a number which has a huge impact on your life.
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