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Comprehensive credit reporting may be raising 'at risk' numbers

By Daniel Ross

News that millions of Aussies are at risk of credit default has some experts pointing fingers at the new comprehensive credit reporting system. But there are things you can do to get back on track yourself, ensuring you'll have access to credit in the future.

According to an October 2014 Veda report, approximately 2.1 million people (13 per cent of credit-active Australians) are at risk of default in the next year, and a little more than 601,000 are at a high to extreme risk of credit default.

A Veda score is a number from 0 to 1200. The national average Veda score is 760 -- up from 751 in 2013; a score of 200 means you have a 50 per cent chance of having an adverse credit event within the next 12 months.

Consumers, however, should be careful to put those figures into context, says Steve Brown, director of consumer risk solutions at Dun & Bradstreet. "That doesn't mean that 2 million Aussies will default," says Brown. "In any scoring scenario, you're going to have individuals at lower risk, some who are at higher risk and the rest of us who are somewhere in the middle."

Why are so many at risk?
Many consumers may not even know that they're at risk: 85 per cent of Australians have never accessed their credit profile, while fewer than 14 per cent have accessed their credit report in the last two years, according to a March 2014 Experian report. If people don't know they're at risk, they aren't taking steps to improve their status.

The comprehensive credit reporting introduced in March 2014 - replacing the old negative system in which only major defaults were recorded -- may also be a factor. The new system does give credit providers a clearer picture of your credit worthiness than the old negative reporting system, Browns says. But consumer watchdogs are concerned it may not necessarily be more accurate.

In New Zealand, where comprehensive credit reporting is more established, as many as 50 per cent of Dun & Bradstreet's consumer credit files accessed by credit providers in May 2014 had at least one black mark in their comprehensive credit history.

Consumer watchdog groups such as Choice are concerned that, in light of Dun & Bradstreet's findings in New Zealand as well as the recent Veda report, the new comprehensive credit reporting system is unfairly tarnishing some consumers as being credit risks.

System may improve with time
Brown argues that, as lenders continue to accrue consumers' credit information, the system is gradually providing lenders with a much clearer and more accurate picture of someone's credit worthiness.

"If you start adding in that payment information, comprehensive or positive data, you start to be able to separate out much more effectively the good from the bad. And you also start to see shades of grey: those who miss an occasional payment, those who almost missed a payment and those who never miss a payment," Brown says.

Of course, the longer the new system is around, the more data will be included in it and "at risk" statuses may improve.

"It's still early days," says Brown. "The reality is that we're still 12 months away from seeing widespread use of comprehensive data."

Consequences of being "at risk"
Nevertheless, it's important to start now to ensure that, as comprehensive credit reporting finds it footing over the next 12 months, your credit report is as healthy as possible.

Consumers who have a credit default listed in their credit history, or those who make repeated missed payments, might find it harder to access future lines of credit than someone with an impeccable credit record, especially if risk-based pricing catches hold in Australia, as some analysts expect it to.

Risk-based pricing is a method that lenders use for evaluating credit applicants. Essentially, lenders will offer applicants with a good credit history better deals and rates of interest than those with a chequered credit history.

Andy Sheehan, senior vice president of marketing at Experian, believes that, as people's credit histories continue to accrue information, more lenders could jump on the risk-based pricing bandwagon. "The fuller picture that's available to lenders, I think it promotes more granular product offers that are part of risk-based pricing," says Sheehan.

Preventive steps you can take
"First, get a copy of your credit file and get an insight," says Brown. You can access your credit report free once a year.

With an overview of your credit history, make changes where necessary. If you have a habit of making late payments, change your payments habits. Automatic payments are an obvious remedy.

If you're finding it difficult to make payments on existing lines of credit, talk with your lender to see what can be done to ease your repayment scheme. And close any lines of credit that aren't absolutely necessary.

You can even mitigate the impact of any previous credit defaults by paying them off, says Brown. "It doesn't wipe the slate clean," says Brown. "But the status goes from unpaid to paid, which is something that many lenders would take into consideration and will improve your overall credit profile."

Published: October 17, 2014

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