You might have heard the term ‘comprehensive credit reporting’ being bandied about but may not be sure how it affects you and your finances. So let's explain it.
What is it?
Previously, credit bureaus in Australia (for example, Equifax) used a negative credit reporting system, where only credit enquiries (for example, home loan applications) and negative information (defaults) were noted and used by lenders in loan assessment decisions.
Comprehensive credit reporting (or positive credit reporting) refers to a change to the information that is now gathered. In contrast to negative credit reporting, it includes more affirmative data (confirmation of good repayment history), as well as more detailed information about individual credit commitments (such as the date accounts were opened or closed). It also involves credit scoring being updated more regularly, given that monthly repayment information is to be included in the credit report.
What are the benefits?
Comprehensive credit reporting (CCR) will allow lenders to make more informed decisions concerning an applicant’s financial situation.
Additionally, it provides a potential bargaining chip for prospective borrowers, including new borrowers (for instance, young adults or recent immigrants). More detailed information about a person’s financial position allows them to demonstrate sound financial character given that positive information – such as rental payment history – is shown on the report, whereas previously first-time applicants had a blank credit file.
Applicants who had minor issues recorded on their credit history (for example, they may have missed a phone bill a few years ago but otherwise all financial commitments have been made as scheduled) should also see their credit score improve rapidly if stable credit behaviour is demonstrated over time following the resolution of the issue in question.
What are the drawbacks?
First: privacy. CCR will involve extra and more detailed data being maintained by a third party, providing a potential target for perpetrators of identity theft if security breaches occur. Furthermore, there is also the possibility that this information will be accessed for purposes other than assessing the creditworthiness of a loan applicant.
Second, as CCR provides more comprehensive credit information it may adversely affect some borrowers – those with a few blemishes on their credit history – resulting in a worsening credit score if a new application is declined and forcing them to utilise second-tier lenders and more expensive loan products.
Third, the big four banks in Australia, which operate as an oligopoly, have greater capacity to use regulation to improve profitability over customer satisfaction. Banks will have a better visibility of their customers’ risk profile, but it is unlikely that someone with an outstanding credit record will be given a cheaper loan. The APRA directives requiring banks to restrict the growth of investment and interest-only lending resulted in substantial interest rate increases for existing and new borrowers in 2017.
Fourth, CCR is a measure of past performance. It cannot anticipate future events such as unemployment/redundancy, illness, separation and so on that may cause foreclosure.
How can you prepare for these changes?
The best way of preparing for CCR is to manage your existing finances prudently. This involves ensuring all your commitments (rent/loan repayments, bills and so on) are paid on time and that your credit limits and savings accounts are not overdrawn. One way of achieving this is to set up direct debits for each of your financial obligations so they are paid automatically when due. You should also have strategies or plans in place to deal with emergencies.
Finally, you should avoid unnecessary blemishes to your credit report that may be brought about by regular credit enquiries over a short period of time. A qualified mortgage broker can assist you in obtaining finance to meet your needs in a more suitable way.