One of the big four banks has flagged that it will start sharing much more information about customer accounts to credit reporting agencies as part of the so-called Comprehensive Credit Reporting (CCR) system from as early as August 2015.
As more lenders get on board, it could see many would-be borrowers declined for a home loan.
What is positive credit reporting?
You may have heard about CCR or the positive credit reporting regime in the media over the past few months and what it basically means is that credit providers and lenders that hold an Australian Credit Licence (ACL) will be able to share and access more data about your credit history from your credit file.
The Comprehensive Credit Reporting regime actually came into effect in March 2014 following amendments made to Privacy Act 1988.
Up until these changes, a credit reporting agency only collected and allowed lenders to access relatively limited or ‘negative’ view of consumer data such as missed payments or defaults of more than 60 days and bankruptcies. Specifically, files contained:
- Personal details including your name, address and date of birth.
- Credit enquiries including credit or loan applications.
- Paid and unpaid defaults.
- Personal insolvency information, court writs, court judgments and directorship information.
- Bankruptcies and Part 9 agreements.
With Comprehensive Credit Reporting, credit reporting agencies Equifax (previously Veda Advantage), illion (previously Dun & Bradstreet), Tasmanian Collection Service and Experian are now able to record:
- The type of credit accounts you have: This includes the maximum term and whether the payments are interest-only or principal and interest, as well as the date an account was opened and closed.
- Credit limits: This is the maximum amount of credit available to you for an account such as a credit card. If you accept a credit limit increase the new credit limit could be included on your credit history.
- Your monthly payment history on loans and credit facilities: This will show that you’ve made the minimum payment requirement on your financial commitments each month on time. Payments that are more than 14 days late will be recorded as a ‘late payment’, which is different to a default, which is an overdue payment of more than 60 days.
The changes actually bring Australia in line with countries like the United States, UK and New Zealand who have already implemented a similar regime.
Comprehensive Credit Reporting isn’t actually having much of an affect on Australians’ credit files because it is currently a voluntary system and not all lenders and credit providers have signed on to it. Well, not yet at least, but in the next 6 to 12 months it’s likely most banks will be on board.
How can it work against you?
Basically, now that lenders who have signed up to positive credit reporting can access this new data, they can see information that was previously hidden.
So, for example, in the past, you could have been approved for a home loan because your credit report was free of defaults and had minimal credit enquiries.
However, any late repayments on credit card repayments of more than 14 days will now show as a ‘late repayment’. One or two might not affect your application too much, but having multiple ‘late repayments’ could indicate that you’re having trouble managing your finances.
Your credit card limit is also recorded as part of positive credit reporting so if you have a $5,000 a month limit on your credit card but you only use $2,500 a month and pay for your other expenses with savings, your report will still record a $5,000 figure.
The problem too is that most banks rely on a so-called credit score to assess mortgage applications, an automatically produced score that’s based partly based on information in your credit file.
The bank will take this information on face value without delving into the reasons why an applicant may have black marks like missed repayments or many credit enquiries.
Luckily, there are some lenders that don’t credit score at all and take a more common sense approach when assessing home loan applications.
How positive credit reporting can work in your favour
It’s potentially not all negative, positive credit behaviour can actually help negate past credit file blemishes.
For example, if you defaulted on a credit repayment but have since been making your repayments on time, the new system records this data, which could work in your favour in building a strong application with the bank.
Overall, CCR could also mean:
- Less time to establish a credit report: Great if you’re a first home buyer or you’ve recently migrated to Australia.
- More bargaining power with lenders and credit providers: You won’t be at the mercy of the lender that charges a premium if you’re in a position to get approved with multiple lenders.
How will positive credit reporting affect my Equifax Score?
Your Equifax Score (previously VedaScore), which is different to a banks’ credit score, is a number from 0-1200 that’s generated by Equifax based your strength as a borrower compared to the rest of Australia.
The Equifax Score is a big deal because many lenders feed Equifax’s score directly into their own scorecard. In saying that, some lenders ignore Equifax Score completely.
Comprehensive credit reporting will affect your credit score in the following ways:
- Once monthly repayment history information is included in your credit report, it will update regularly and will mean that your Equifax Score will change from month to month.
- Consumer credit defaults less than $150 will be removed from your credit report. The minimum amount for a default is now $150. The minimum amount for a commercial credit default remains at $100.
- Paid defaults will be removed from your credit report if it is over 5 years old. If it is less than 5 years old it will convert back to a default.
Not sure what your Equifax Score is? You can actually contact Veda Advantage and they can send you a copy.
How to prepare for the new regime
- Pay bills and loans on time by setting up direct debit and scheduling loan repayments for your pay day.
- Only apply for credit if and when you need it.
- Be careful about constantly switching credit card providers.
- Talk to your credit provider if you’re under financial stress. They may be able to set up a payment plan for you.
- Notify your credit providers of your new address when you move.
- Get your credit score and make sure the information is correct.
What do Australians actually know about their credit report?
According to a recent survey by Experian:
- Around 80 per cent of Australians have never accessed a credit report and only 7 per cent have requested a credit report in the past six months.
- Around 34 per cent said they didn’t know what a credit report was and 77 per cent didn’t know how credit scores were used by credit providers and lenders assess applications.
- Only 18 per cent knew about Comprehensive Credit Reporting.
What should I do now?
Keep checking our blog page and our Facebook page for updates on positive credit reporting.
The most important thing to keep in mind with Comprehensive Credit Reporting is that although every credit reporting agency in Australia is on board, it isn’t yet mandatory for ACL-licensed credit providers.
Australia have been slow to implement positive credit reporting changes and the changes made to the Privacy Act but it pays to be prepared.
For existing customers, we can organise to get you a free copy of your credit file.
If you think your credit file may stop you from getting a home loan, please give us a call on 1300 889 743 or by completing our free assessment form today.
Our mortgage brokers are credit specialists and they know how to present a strong case with the right lender to give you the best chance of getting your home loan approved.