Borrowers will soon feel the power of positive credit reporting
The National Australia Bank (NAB) is the first major Australian bank to begin using comprehensive credit reporting (CCR) but not just yet for home loan applications.
Its system will be implemented for personal loans, credit cards and overdrafts but the bank said that it would be rolling positive credit reporting out for other types of lending later in the year.
“Under comprehensive credit reporting, we now have a more holistic picture of a customer’s credit situation, so we’re better able to make sure our customers receive the right type and amount of credit for their individual circumstances,” NAB chief operating officer Antony Cahill said.
“We believe CCR is good for competition and will mean better outcomes for customers.”
So is mandatory credit reporting just around the corner?
The news from NAB comes after the draft legislation on mandatory comprehensive credit reporting was released earlier this month.
The Government has long argued that CCR will work wonders for borrowers who wouldn’t have previously been approved for a mortgage.
Speaking at the FinTech Australia Collab/Collide Summit, Treasurer Scott Morrison said that “less than 1 per cent of CCR data is currently being shared in public mode.”
“The banks will be required to have 50 per cent of their credit data ready for reporting by 1 July 2018, increasing to 100 per cent a year later,” he added.
While the draft legislation is still open for submissions, all signs are pointing to the four major banks – NAB, ANZ, Commonwealth Bank and Westpac – coming on board. Soon after, other Australian lenders will fall in line.
Isn’t comprehensive credit reporting a good thing?
Yes and no.
Some winners will be first home buyers, who will have the chance to more quickly build a credit file.
However, there will also be lot of losers from positive credit reporting who could have their Equifax score (formerly Veda Score with Veda Advantage) dragged down.
Read more about the pros and cons of comprehensive credit reporting.
Case study: how CCR can be a positive
John has a $450 unpaid default with a collections agency and a credit card with a $10k credit limit.
Prior to November 2017, his credit score with National Australia Bank (NAB) would have been 594 because his repayment history wouldn’t have been considered.
John’s credit card repayment history has actually been perfect.
Luckily for John, since NAB came on board to CCR in November 2017, his repayment history is now considered when calculating his credit score, bringing his new score to 709 (first image).
That’s well above average and makes a massive difference for his ability to qualify for a home loan!
Once John’s defaults are removed from his credit file (which will be in about a year), his credit score will actually increase to over 1,000 (second image), allowing him to qualify with even more lenders.
What can you do to prepare?
- Only apply for a home loan when you need it: Speak to a mortgage broker so they can properly assess your situation and match you with a lender that will be more likely to approve your application.
- Do not overdraw your credit card.
- Pay your bills and repayments on time: Set up direct debit, have loan repayments scheduled for your pay day and always keep extra funds in your savings account so you never miss a payment.
- Pay any defaults listed on your credit file: Paid defaults look way better on your credit file than unpaid defaults.
- Stay in your current job and at your address until you apply: This basic information will still play an important part when banks generate their own credit score.
- Be a good saver: Making regular deposits into your savings account displays your reliability as a borrower and future mortgage holder.
- Talk to your credit provider if you’re in financial hardship: They may be able to help you by setting up a payment plan.
- Ensure your credit file is accurate and up-to-date: If you’re a Home Loan Experts customer, we can apply to get you a free copy of your credit file so you can double check that it has no errors.
A few smaller lenders have already started rolling out positive credit reporting systems when assessing finance applications.
With NAB pushing ahead, it’s clear that comprehensive credit reporting is here to stay.
If you’re unsure whether your credit file is up to scratch, speak with one of our specialist mortgage brokers on 1300 889 743 or by completing our free assessment form today.