Your credit history could be about to take a whack as new laws on credit reports come into play which give lenders more information about how you manage your credit and even if you pay your bills on time.
A credit report can make the difference getting a ‘yes’ or ‘no’ on an application for a credit card, a car loan, home loan or even approval for a mobile phone plan. It’s the way banks and other lenders decide whether you can afford to pay back the debt.
From March 12, lenders will get a comprehensive view of your accounts beyond negative information such as defaults and court judgements. They will now be able to the type and number of accounts and timeliness of payments.
But research by the credit industry peak body Australian Retail Credit Association (ARCA) shows almost 60 per cent of consumers have not heard of credit reporting.
ARCA CEO Damian Paull said the changes would benefit consumers and industry, as well as help increase credit awareness.
“These reforms will bring Australia into line with other OECD countries and will help empower consumers by improving awareness and engagement with their credit report – as is common in other countries,” Mr Paull said.
Here’s what you need to know about it.
What is credit reporting
A credit report is a file on your personal financial history used by businesses when you apply for credit to work out whether you can afford to pay for the services they are offering.
It will have details about your credit history, your name and identifying information, as well as other information including whether you’ve been bankrupt, and any court judgements against you.
The credit history contains credit applications and any default listings (bills unpaid after 60 days) for unpaid credit amounts.
What is changing
The changes from a “negative reporting” system to “comprehensive reporting” will bring Australian into line with the rest of the OECD. The Privacy Act sets out the rules about what can be in your credit report and how it can be accessed and used.
From 1991, Australia had a “negative reporting” system meaning that any bad information, such as defaults, would be visible in your history, but not information that shows you’ve managed your credit well.
From March, Australia will have comprehensive credit reporting, showing “positive data” such as the types and number of accounts opened, the amount of credit available and the timeliness of payments.
This means, for example that as well as showing applications for credit, your report will now reveal whether you were successful or not. Likewise, while the report always showed if you defaulted on a bill or payment, now it will also show if you have paid on time.
The new system gives lenders a view of not just the results, but also how you manage your credit on an ongoing basis – a much fairer system. The downside is that every time you pay a bill late, this will come up as a black mark on your credit history.
The effects of the change
Pocketbook said in January, 12 per cent of all bills were paid late – so a significant proportion of people currently pay bills late by habit already. In fact, they said this could be the most “is perhaps the most significant legislation change to your personal finances in your lifetime“.
This is worth noting because of the relatively low number of people who are aware of the changes and the importance of credit history.
But the Australian Retail Credit Association say the introduction of a comprehensive system in other countries has meant better credit practices and outcomes for borrowers, credit providers, and national markets.
“Expanding the information pool … has in fact increased responsible access to credit and engaged new market segments that have previously been difficult to assess – namely younger people and small businesses,” ACRA said.
Credit reporting company Veda’s marketing manager Belinda Diprose said it was now “more important than ever” to understand what’s on your credit file, establish good repayment habits and manage your credit profile.