June 7, 2018
A new system of credit scoring that will see significant changes for borrowers will come into effect on July 1, even though most Australians are unaware of it.
From next month, comprehensive credit reporting (CCR) will force banks and other institutions who use Australia’s credit reporting system – such as phone companies and electricity retailers – to both share both positive and negative information with other lenders.
The changes are expected to increase most people’s credit scores, making it easier to access lower loan rates.
But people with a poor payment history could find it harder to access credit, or be charged higher rates.
At present, most lenders only share negative information such as credit applications, defaults, overdue payments, bankruptcy and court judgments.
Under the new system, they will also be required to share positive information, such as when someone made all their repayments on time.
The introduction of the new system will mean people with a history of making regular payments, repaying loans early or closing unused accounts will be able to demonstrate their credit-worthiness and be rewarded with a better deal from lenders.
CCR has been operating in Australia since 2014, but the major banks refused to take part in it until the Federal Government made it compulsory from July 1.
At present, most credit scores sit between 300 and 750, with higher numbers regarded as better.
Australia’s three credit reporting agencies – Dun & Bradstreet, Equifax and Experian – believe the introduction of CCR will see most scores increase.
This was the experience in the UK, the USA and other countries when CCR was introduced more than a decade ago.
This will give consumers more leverage to negotiate a better deal from banks, telcos, insurance companies and utilities.
The changes to credit reporting are also expected to increase competition among lenders.
Credit agencies have advised the most important thing people can do to make the most of the new CCR system is to pay their bills on time and repay loans promptly.
However, consumer advocates have warned that based on current data, between 10-20 per cent of Australian consumers and businesses may find themselves “credit impaired” when the new system begins.
They also warn that a decade after CCR’s introduction in the UK, a 2014 study found 57 per cent of the UK’s population had difficulty accessing low-interest finance.
The study found being classified as “credit impaired” in the UK had an impact on other areas of people’s lives such as the interest rates they paid on mortgages, employment, the ability to access rental properties and the establishment of accounts for small purchases.
This had the effect of pushing desperate borrowers into the hands of alternative financial providers who could charge interest rates up to 10 times higher than those charged by mainstream banks.
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