Prepare now for comprehensive credit reporting
By Daniel Ross
With the
new comprehensive credit reporting system looming in
March, credit
reporting agencies are urging consumers to start looking at
their credit behaviour now.
Under the new system, your credit report will include the opening and closing dates for all your credit accounts, the type of credit for each account, names of creditors and credit limits. Creditors may retroactively give the reporting agencies information about your credit history going back to December 2012, though most are not expected to go back any further than December 2013.
Comprehensive credit reporting comes as part of a much larger package of reforms designed to strengthen existing privacy laws. According to Belinda Diprose, marketing manager for the credit-reporting agency Veda, the latest reforms also will:
- Ensure that the additional data on credit reports isn't used for marketing purposes
- Increase the legitimacy of external dispute resolutions
- Extend the ban period surround identity theft -- if your identity is stolen, you can freeze access to your credit report for an extendable 21-day period
But the major changes are intended to make credit reports a more accurate picture of a person's credit worthiness by recognizing good behaviour as well as bad. Below are four tips for making the most of the impending changes.
1. Make all your payments by
the due date
While negative-data reporting in the current system allows
consumers to make payments up to 120 days late without
seeing their credit history impaired, Steve Brown, director
of Consumer Risk Solutions at Dun & Bradstreet says that the
new comprehensive system will follow payment histories with
far greater scrutiny.
Because of the retroactive reporting, your payment history now is important, even though the new rules are not in effect yet. "I know it may sound simplistic or trite, but do ensure that you make all your account payments each month on time," says Brown.
Brown acknowledges that the new system gives consumers a five-day grace period after a payment is due before it is reported as late, but encourages consumers to not rely on it.
"We strongly suggest that consumers don't work to exploit that grace period in case of any processing problems or any difficulty in recording those transactions," he says. Plus, all normal interest rates will still apply during that period.
Brown says those in particularly dire financial straits should talk to their credit providers and try to reach an alternate arrangement, or consolidate loans.
"Sometimes there are those occasions where you just can't pay on time," he says. "While that might not stop you having the delinquency on your file, it may stop it from escalating further, which could lead to court action."
2. Make the most of a second
chance
Negative-data reporting is called that for a reason -- only
derogatory information, such as defaults and bankruptcies,
are included in the report. Comprehensive credit reporting,
on the other hand, looks at the broader picture. That means
consumers with bad credit histories will have the
opportunity to make up for prior mistakes over time.
"One of the key points to many people who have had credit problems in the past is that this is an opportunity to almost wipe the slate clean," says Brown.
That doesn't mean any previous defaults and bankruptcies will be expunged from your report. But if you illustrate a willingness to manage your credit better -- make payments on time and reduce existing debts, for instance -- your report will call attention to and reflect those efforts.
"You don't need to lose heart, even if you have had a transgression in the past," says Brown.
3. Familiarise yourself with
your credit report
Under the new system, Aussies can access their credit
reports once a year for free. This is great news for a
country that tends to regard credit reports with an upturned
nose.
"Eighty per cent of Australians have never checked their credit history," says Diprose. "But it's now going to be more important than ever for them to actively manage their credit report. You're going to find that it will change monthly."
Those monthly updates won't be immediate, as it will take some time for credit agencies to compile the necessary information to start updating credit scores regularly. "I think it will take 12 to 18 months before you see things really ramping up," says Diprose.
"I like to use the analogy of the picture slowly coming into focus in the dark room. Gradually, you'll see more and more information materialise on your file as the months pass," says Kim Jenkins, managing director of Experian A/NZ.
4. Be smart about credit
applications
The new system factors the number of accounts you have open,
as well as the number of times you've applied for credit.
According to Jenkins, credit providers use those figures to
determine what kind of credit risk you might pose.
"If a person has three or more accounts, they're twice more likely to default on their debt than a person with one or two accounts," says Jenkins. But the type of loan matters, too -- someone with a house and car loan as well as a credit card is considered a normal risk for credit, while someone with three or more credit cards tends to be kept at arm's length.
According to Jenkins, there's a similar equation for credit card enquiries:
"People who have made five or more enquiries are three times more likely to have a default at some point," she says.
Jenkins suggests shopping around and doing your homework before you actually sit down and fill out an application.
"Don't do your homework by submitting application forms," she says.
See related: Changes coming to Aussie credit score system, Got bad credit? 4 ways to boost your score