Recording customers’ detailed positive and negative credit information on their credit histories was recently made mandatory for the country’s big four banks – ANZ, Commonwealth Bank, NAB and Westpac – with other large lenders set to follow by mid-2021. The new system is intended to allow lenders to more accurately assess risk, using a fuller picture of potential borrowers’ credit histories. It 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 late payments.
This article explains:
What is negative credit reporting?
Negative credit reporting is the system Australia operated under until March 2014. It was based around credit reporting companies only keeping a record of negative credit information. When someone applied to borrow money or take out a credit card, lenders based their assessments of the applicant’s credit history solely on whether they had any negative events on their credit report, 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, bankruptcies, or court judgements the customer had experienced. However, it didn’t show more detailed information about the customer’s credit history, such as cases when they had successfully managed their credit obligations by making their repayments and paying off their loans on time.
What is positive or comprehensive credit reporting?
Starting on 12 March 2014, Australia began the move to a “comprehensive credit reporting” system, or CCR for short. Also known as positive credit reporting, CCR is Australia’s new credit reporting system aimed at making it easier for lenders to form more comprehensive and balanced assessments of applicants’ credit histories.
As well as the information it contained before, a credit report under CCR now includes information about current accounts a customer holds, what accounts they have opened and closed and up to 24 months of repayment history, including whether they met their repayments on time.
Along with bringing changes for both lenders and clients, Australia’s switch to CCR has brought its credit reporting system in line with countries like the USA and the UK, both of which have long had some form of positive credit reporting in place, as well as New Zealand, which introduced it two years before Australia in 2012.
While there are some potential downsides of comprehensive credit reporting, such as the fact some of the new information being reported could actually be viewed negatively by lenders, the move towards a mandatory comprehensive credit reporting system has largely been seen as a step forward for lenders and many consumers, in that it could encourage responsible lending practices and offer lenders a fuller, more accurate picture of borrowers’ credit histories, in turn potentially giving access to better deals for borrowers with a track record of reliable repayments.
Comprehensive credit reporting in Australia first became legal in 2014, but due to a relatively slow uptake of the system, the Government imposed deadlines for major lenders to get on board. The big four banks were required to provide 50% of their credit data to credit bureaus like Equifax, Experian and Illion by 30 September 2018, and 100% by 30 September 2019. At the time of writing, it is not mandatory for other credit providers to provide their comprehensive credit data to these reporting bureaus, although they may choose to do so voluntarily. A Bill to extend the mandatory CCR regime to other large lenders is currently before Federal Parliament.
Potential benefits of comprehensive credit reporting
The Australian Government and other groups in favour of comprehensive credit reporting have highlighted several possible benefits that it can offer to consumers and lenders:
- Under CCR, your recent positive behaviour is registered (e.g. if you have made all your required payments in the past two years), which may balance out some previous negative slip-ups such as a missed payment a few years ago.
- People with a “thin” credit file or a fairly short history of credit will now potentially have more information in their file concerning their creditworthiness, which may make it easier for banks to decide whether to extend credit to them.
- The impact by just one single negative event, such as a missed payment, may not be as significant or as long-lasting as before, because it can now be balanced out by positive factors. Nonetheless, repeated missed payments or a general pattern of credit stress would still damage an individual’s credit rating.
- An individual’s credit score or credit rating is potentially more accurate and comprehensive under CCR, due to their credit report containing more detailed information than a credit score that was constructed using negative reporting.
- Having access to more comprehensive pictures of consumers and their credit-related behaviour could help lenders meet their responsible lending obligations and allow them to identify credit stress at a much earlier stage, potentially leading to fewer bankruptcies and bad debts.
- Lenders can potentially tailor their products and offers more, using the more comprehensive picture they will likely have of consumers’ creditworthiness and consumer behaviour in general. This could mean cheaper loans for people with strong repayment histories and high credit scores.
Potential downsides of comprehensive credit reporting
While comprehensive credit reporting is often seen as a boon for consumers and lenders alike, it is not without its possible drawbacks. For example:
- Comprehensive credit reporting involves up to 24 months of a customer’s repayment history being recorded – not just their positive history. As the ABC has reported, this could result in your credit score going down under CCR if, for example, you have multiple credit cards that you are frequently late in paying off.
- On the subject of credit cards, your credit report under CCR will now show what your total credit limit is, but still not how much money you actually owe. As a hypothetical example, if you had two credit cards with a credit limit of $5,000 each, a lender may view you as having $10,000 in liabilities across those two cards, even if you only owed $500. This could make it difficult for you to obtain a home loan or other credit product.
- The fact that lenders can now tailor their products more easily based on how risky they perceive a potential borrower to be could mean that people already struggling to make their repayments end up being charged more in interest than other consumers, according to some advocacy groups such as the Consumer Action Law Centre.
- Not all lenders in Australia are required to participate in the comprehensive credit reporting system at the time of writing, which means that if you have multiple credit providers, the types of information they provide to credit reporting companies could be inconsistent.
If you are experiencing debt or financial stress, you can try contacting your lender or speaking to a financial counsellor for help. You can speak to a financial counsellor for free by calling the National Debt Helpline on 1800 007 007. You may also be able to get free financial counselling through some community organisations, community legal centres and government