As of 1 July 2018, recording positive credit information on credit histories is mandatory for all credit providers. This is intended to allow lenders to better assess risk using a fuller picture on potential borrowers’ credit history and could be beneficial for people who have the means to take on a loan but may have had a few blemishes in the past, such as one or two missed payments.
What is Negative Credit Reporting?
Negative credit reporting is the system Australia operated under until March 2014, which was based around only making a note of negative credit events. Lenders based their assessments of a potential borrower applicant solely on whether the applicant had any negative reports on their credit history, such as missed repayments or defaults.
Banks, credit unions and other lenders could access information concerning a potential customer’s credit applications – but not whether the application was approved or not. The credit report also included details of any overdue debts, defaults, bankruptcy, or court judgements.
What is Comprehensive (Positive) Credit Reporting (CCR)?
Also known as Comprehensive Credit Reporting (CCR), positive credit reporting is Australia’s new credit reporting system aimed at making it easier for lenders to form comprehensive and balanced assessments of applicants’ credit histories. The credit report includes information about current accounts held, what accounts have been opened and closed, the date default notices were paid and whether repayments were met.
Along with bringing changes for both lenders and clients, Australia switching to CCR has brought our credit reporting system in line with other OECD countries, many of which have some form of positive credit reporting. It’s common practice in the USA and UK for consumers to use their positive credit rating as leverage when looking for a loan of any sort, and CCR will potentially allow for Australians to do the same.
While some may raise concerns over the increased amount of personal financial information being given to banks, the comprehensive credit reporting system is largely seen as a positive step for consumers and lenders, encouraging responsible lending practices and enabling consumers to build a more comprehensive and positive credit report that could help them get a better deal from their chosen lender.
Due to a relatively slow uptake of the system (initially recommended in 2014), the Government imposed deadlines for the CCR. The big four banks were required to provide 50% of their credit data to credit bureaus by July 2018 and 100% by July 2019.
Potential benefits of Comprehensive Credit Reporting (CCR) for consumers
- Recent positive behaviour is registered (e.g. if you have made all required payments in the past year), which may balance out some previous negative slip-ups (e.g. a missed payment a few years ago).
- People with a “thin” credit file or a very short history of credit will now potentially have more information in their file concerning their credit-worthiness, which may make it easier for banks to extend credit to them.
- The credit scores of individuals may not be significantly impacted by just one single negative event (e.g. a missed payment). Instead, it would generally take the credit report listing repeated missed payments or a general pattern of credit stress to impact on an individual’s credit rating.
- An individual’s credit score or credit rating is potentially more accurate and comprehensive, compared to a credit score that was constructed using negative reporting.
Potential benefits of CCR for lenders
- Having access to more comprehensive pictures of consumers and their credit-related behaviour could support more responsible lending.
- Lenders can further tailor and differentiate their products and offers, using the new, more comprehensive depiction of consumer credit worthiness and consumer behaviour in general.
- CCR allows lenders to identify credit stress or over-committal at a much earlier stage, potentially leading to fewer bankruptcies and bad debts.
Click here for some more information about comprehensive credit reporting from Credit Smart.
Canstar Q&A with Paul Abbey – Chief Risk Officer at MoneyPlace
MoneyPlace is one lending platform that has embraced CCR. Canstar got in touch with its Chief Risk Officer Paul Abbey to learn more.
Q: Why did MoneyPlace get on board with CCR, and how have MoneyPlace’s customers benefited from this?
When we started the business, we put CCR at the top of our things to do list. We knew that without CCR, customers would continue to be at a disadvantage because they would be unable to show a true picture of their creditworthiness. As an early adopter (we’ve been contributing for over six months now), we have already observed a positive movement in credit bureau scores for MoneyPlace customers that have good repayment behaviour. Often, new customers that were previously categorised by a credit bureau as ‘very good’ before getting a MoneyPlace loan have now improved to ‘excellent’ simply because they have made their scheduled repayments on time.
The snowball effect is that borrowers should expect a better interest rate on their next personal loan, credit card or mortgage because lenders can now see this information and can underwrite more accurately. For some prospective borrowers, CCR gives them a chance to be considered for a loan that they would otherwise be knocked back for because of the extra data lenders have at their disposal.
Without CCR, customers waste their good repayment behaviour, and lenders tend to price customers higher (or simply decline them) because they do not understand the risk well enough. We cannot stress how positive CCR is – it helps the entire ecosystem.
Q: What are some ‘positive’ things a customer could do to boost their creditworthiness?
- Pay your bills on time – always, and no exceptions. Direct debit is a great option to remove the chore of remembering. Remember, both ‘good’ and ‘bad’ repayment behaviour is shared with the credit bureaus under CCR.
- Regularly check your details held by the three credit bureaus (Veda, D&B and Experian). Consumers are entitled to a free copy of their credit file once a year, and it is vital to check the accuracy of the information. The report will list all credit enquiries, current/past addresses, any defaults/bankruptcies and in some cases positive reporting data too.
Q: Why do you think traditional lenders have been slower to implement CCR?
Despite increasing pressure from the Government, participation up to this point has been voluntary. If you are a traditional lender, one of your major competitive advantages is your customer data, so making this accessible to other lenders is not an easy sell. No bank wants to make it easier for new innovative lenders to win market share. There’s also the argument that the banks own this data rather than the consumer.
Q: How can consumers protect their credit report?
Your credit file is an incredibly important and valuable asset – identity theft (where a person uses your personal details to fraudulently apply for credit, in your name) is a growing trend across Australia. Be aware of how much information you provide to social media websites (e.g., date of birth, addresses, etc.) as well as taking care of physical IDs like a drivers licence as this can help aid a fraudster to assume your identity.