Changes coming to Aussie credit score system
By Daniel Ross
Major changes to Australia's credit
score system are coming that will widen the scope of
information used by credit rating agencies to compile credit
scores -- a move that will have repercussions for both
lenders and consumers.
As it currently stands, Australia is a negative data-reporting country. This means your credit report includes only a relatively narrow range of negative information provided on your credit applications, such as bankruptcies, defaults and any instances where you've been denied credit.
In 2014, reforms will bring Australia into line with other Western countries, where positive credit scores are the norm. Credit agencies will consider new variables such as your payment history and will recognize and reward good credit behaviour.
According to Kim Jenkins, managing director of Experian A/NZ, the move has the potential to improve overall access to credit.
"The new legislation comes into effect next March and consumers do need to be aware of what this change means for them," says Jenkins. "They can expect to have a stronger relationship with their lender and [they] will have better access to credit that is suitable to their needs."
Negative information dominates
now
With the
entry of Experian
into the Australian market earlier this year, there are
now three credit reporting agencies here.
Veda and Dun &
Bradstreet are the other two. According to Steve
Brown, director of Consumer Risk Solutions at Dun &
Bradstreet, the lack of scope in the current reporting
system limits dexterity in the way the three agencies report
information.
"We've got a system that is very binary," says Brown. "You either have a clear file, with no adverse information, or you have an adverse file. There are no shades of gray."
What this means for consumers is that even one financial transgression can essentially eliminate your access to credit for up to seven years, depending on the data in your file. "If it's a default, judgment or summons, it stays on your file for five years. If it's a bankruptcy, it stays on your file for seven years," says Brown.
Applications for credit that are sent to the credit bureau are also included on credit reports under the current system.
More positive reporting to
come
The new credit reporting code is still awaiting completion
by the Australian Privacy Commissioner.
Despite this technicality, Brown believes that credit
bureaus have already formalised much of what will be
included in the code.
He thinks when the new legislation goes into effect, lenders will be able to note every time you open or close an account, what the credit limit on that account is and whether you make regular payments.
"So this will start to look similar to the systems in place in the US, UK and Canadian models," Brown says. "In those jurisdictions, good credit behaviour is rewarded in the same manner that bad credit behaviour is penalised.
"Nevertheless, Australia still won't look the same as those other models," says Brown. "What's missing from the Australian model is the account balance -- that won't be shown. Neither will the amount of the balance paid each month."
Other changes that Brown expects to see in the finalised code include:
- A new 30-day limit that requires credit-reporting agencies to resolve legitimate credit correction requests
- A provision in the new law that allows lenders to retroactively provide data back to December 2012 -- a measure that should motivate consumers to immediately start correcting any bad credit behaviour, such as paying late bills
What this means for consumers
Brown predicts that instead of punishing consumers for
relatively minor financial infractions, the new system will
give lenders the ability to make a more reasoned judgment as
to whether a customer is a good fit for credit.
"What the positive structure will do is assure individuals who have had one life issue -- sickness or loss of job, for instance -- that they won't get blocked out of the market for the next five or so years. You'll be able to continue paying existing accounts, and that positive performance will start to flow through on your credit report," says Brown.
Bad financial behaviour such as credit surfing - when consumers seek new lines of credit to pay off existing accounts -- should also be easier to identify before the consequences of that behaviour has reached critical mass. As such, Brown says that transparency in the new system will afford lenders the ability to identify those individuals falling into a financial spider-web.
"Because we only have these really quite severe negative issues that get reported on the credit file, you often need to get into quite a lot of trouble before the credit file reflects the difficulty you're in," says Brown. "What will happen is that people starting to miss payments will become visible to credit providers and credit reporting agencies. So if someone in trouble applies to a new credit provider, their previous history will be visible for all to see."
According to Jenkins, the new code will make it easier for consumers to stay ahead of potential fraudsters.
"Consumers should be aware that they have the right to request one free copy of their credit report per year, and should act on that right annually," says Jenkins. "It's a good tool for consumers to use to prevent identity theft and confirm the accuracy of their credit history."
According to Belinda Diprose, Veda marketing manager, comprehensive credit reporting will benefit responsible customers just as much as it will those who are finding it hard to make ends meet.
"It will help them over time negotiate a better deal with lenders. But I should stress that it will take time before everything's up and running," Diprose says.
Slow information buildup
In the US, the FICO score -- the primary credit score used
in the US -- is something Americans live and die by, as it
affects their life in a kaleidoscope of ways. The FICO score
is a powerful predictor of future credit behaviour because
it includes a rich amount of data.
Because it will take a while for Australian credit reporting agencies to compile a repository of information as extensive as the one used by FICO, Brown says it will be some time before consumers notice any substantive differences made by the new legislation.
"As that positive data builds in the data banks, we won't be at the same point as the US until the latter part of 2014, the early part of 2015," says Brown -- a sentiment echoed by Diprose.
"It will take some time for the data to build up, as well as for consumers to understand what comprehensive credit reporting is all about," says Diprose. "Currently, you've got about 80 per cent of consumers who don't know what a credit file is. And now, you've got to educate them about a whole new system."
For more information on your credit score, and for any developments on the new reporting code, visit checkyourcredit.com.au.
See related: Got bad credit? 4 ways to boost your score, How to dispute errors on your credit report