Australia will have new rules about the information that can be stored on you in your credit file after March 12 2014.  These are the biggest changes in the rules in over 20 years.  Under the new rules the volume of data that can be stored about you in your credit file will be many times larger than in the past.  Lenders will be able to see more about your financial circumstances than they have ever done in the past.  The changes have been flying in under the radar.  It is not all one way traffic though.  For those who understand the changes and act accordingly, they have more influence over lenders loan decisions than ever before.

What new information can be stored?

All the information that was able to be stored in the past will still be stored: this includes any defaults, court judgements, bankruptcies and any credit file enquiries.  The new information will include: the credit accounts you have open and when they were opened or closed, the credit exposure on those accounts, and your repayment history for up to 2 years on each account.

For some cases the credit exposure will have a significant impact, particular for anyone in the habit of lying about their credit exposure on their loan applications!  The new data that should have the biggest impact is repayment history.  Past repayment performance is a very good guide to future repayment performance.  Each month a lender will report on whether you paid your bills on time, more than 30 days late, 60 days late, 90 days late, or 120 days late.   Using this data lenders can improve the accuracy of their lending decisions by around 20% which is a big deal for them.

Why are the rules being changed?

Well the finance industry is behind the change so of course the key motivator for them is to grow their business.  Through the changes they will be able to make much better lending decisions that will help them grow by:

• Avoiding bad debts and so reducing their costs.
• Allowing them to lend in new markets because they are able to assess the risks accurately enough, thereby increasing their revenue.

Both of these are a benefit to the overall economy and will flow through to consumers as lower interest rates, better access to credit, and will contribute to overall growth in the economy.

As compelling as these reasons may seem if you are a banker, they probably aren’t strong enough to justify the privacy intrusion the extra data implies for the average person on the street.  There are other reasons that justify the change though.  The proof of the pudding will be in the eating, but the new system should help some key groups gain access to credit that have had trouble in the past because they can build a positive credit history quickly.  They include:

• Younger borrowers particularly under 25.
• New immigrants.
• Recent divorcees.

Having worked with the data I can vouch for the first of these: the new data makes a very big difference in assessing the true risk of younger borrowers.  The changes will also make the system more forgiving: anyone with a bad credit history will gain some ability to overcome that bad history by regularly paying their bills on time in their more recent history.

What do the changes mean for me?

For one thing it means your credit file will look a lot more complicated that it did in the past.  To make all this complicated information usable, it will be summarised in an overall credit score that will give your file a standard risk rating.  The higher the score, the safer you would be considered for a loan.  Along with the score there will key factors listed that influenced the score and whether they influenced the score in a positive or negative way.  One of my jobs was to work on building Dun and Bradstreet’s credit score.  The score will change when information on your file changes and so will vary from month to month or even day to day.  Start paying more bills on time and you’ll see your score go up, start paying them late and your score will go down.

Among the other information listed there will be any defaults, court judgments, or bankruptcies listed along with enquiries made on your file like in the past.  There will also be open accounts, credit exposure and repayment history that will appear graphical form.

But don’t expect me to be dancing in the streets.

I have to say I feel more than just a little bit uncomfortable about the information lenders are now about to see and what they can now deduce about my lending and repayment habits.  On the other hand I also have a reasonable understanding of the positive impacts that will result and so overall I approve of the changes but not strongly. The changes will result in a more efficient lending system, lead to faster economic growth, greater competition, and provide us with a system that gives people a fairer go in some key aspects.  I’m not strongly in favour simply because I don’t believe better and fairer access to credit is among the most important issue the nation faces.

In a system that relies on credit reporting there is a very direct trade-off between a fair and efficient system on one hand, and a high level of privacy on the other.  This trade-off is unavoidable and how you value each of those aspects  will determine where you think the right balance is.  Someone else with exactly the same knowledge will come to different conclusions because of their values.

What will improve?

We will see a system where lenders should make more profit, interest rates should be lower and it should become easier to get a loan.  If that sounds impossible, you’re curious about why, and you’re game enough, take a look scenario I have put together on the Data Geeks page to understand why.

The old system had two unfair aspects, it was:

• Too punitive.  If you did the wrong thing you were effectively barred from mainstream credit for at least 5 years and there was nothing you could do about it.
• Relied too much on demographic stereotypes.  If you happened to belong to an unfortunate demographic group you were regarded as high risk and again there was nothing you could do about it.

No one designed the system to be like that, it is a natural consequence of having very limited information.  If the only information about you is a black mark, it doesn’t matter that things have changed, it will hang around like a bad smell.  It is statistically true that younger borrowers are riskier that older borrowers, that singles are riskier than those married, that renters are riskier than home owners.  If there is nothing much else to go on you are as risky as the demographic group you belong to.

Under the new system these factors are reduced much closer to their proper perspective.  That you pay your bills basically on time, most of time, is much more relevant than your age to the question of whether it is a good idea to lend to you.  The big winners from the change will be younger borrowers who will find it much easiest to get a loan than they have in the past when they were automatically regarded as high risk.  Paying your bills on time now will at least partially overcome any past bad credit history.

It was one of our early discoveries at Dun and Bradstreet that very recent repayment history is much more important statistically than older history: the system has a natural forgetfulness.  This means that consumers have a lot of control over their credit worthiness, and a change in behaviour will be reflected relatively quickly in your risk profile.  This is a big change from the past.  One word of warning though: while recent good behaviour will generally overwhelm past problems, a default is a line in the sand that is a bad idea to cross.  A past default stays statistically important for a long time.  So don’t be too concerned about being late with the odd payment unless you are currently applying for a loan but don’t let things get out of control.

 

Under the new credit rules that will apply from March 12, 2014 you will have a much greater day to day influence on the credit history that will be used by lenders to decide whether or not to grant you a loan, what credit limit you’ll have and possibly in the future even the interest rate that will apply.  In this post I will explain the actions you should take to build a positive credit history and put yourself in the best possible position when applying for loans in the future.

You need credit to build a credit history.

Maybe it’s obvious, but you actually need some form of credit to build a credit history.  One of life’s chicken and egg problems: you need a credit history to get credit but you need credit to…  So the first step in building a good credit history is to secure some form of credit in the first place.  Under the new rules not all forms of credit are equal, you need some form of financial credit: a credit card, car loan, personal loan, overdraft facility, a home loan, or even some form of retail credit (buy now pay later).  Mobile plans, utility accounts, and rental payments don’t count.  Also, while the rules change on March 12, not all lenders will participate fully straight away.  There may be none that are ready by the actual date.  One way or another make sure you have something like a credit card with a company that is participating in the comprehensive reporting regime.  Fortunately the companies that are likely to be early participants are also those that are generally easiest to secure credit from.

Keep your payments up to date.

Once you have a credit account then the advice is simple: make sure you pay your bills on time and pay at least the minimum repayment, or at least a close to that ideal as possible.  The main factor to be aware of is that only the accounts that are reporting payment statuses count: paying your phone bills on time won’t have an impact on your credit file.  If you do face a tough month it makes sense to pay your credit card bill before paying the gas account.

Your credit file will display a credit score that measures your overall credit risk and you can use this to monitor your progress in establishing a positive credit history.  It will list key factors that influence the score you have been given.  Reduce those that impact negatively and increase those that impact positively.

If you get into trouble.

Life has a habit of throwing curve balls, if you do find yourself having trouble keeping up with repayments then seek advice from a qualified financial counselor.  You should try your best to avoid defaulting on any of your debts, if you can’t avoid that then try your best to get back on track with payments, avoid being taken to court, and finally avoid bankruptcy.  If you have trouble it is best to be open with your lender: they will not hesitate to lodge a default and take further action if they don’t think you are taking your responsibilities seriously.

If you lose access to credit through a default or worse, try to maintain access to at least one financial credit account of some form.  As mentioned, you need a credit account to build a positive credit history and obtaining credit with a default on your credit file is much, much harder than without one.  Under the new system it is possible to at least partly rehabilitate your credit worthiness by a stretch of on time repayments to counteract the negative impact of the default.

 

 

Unfortunately your credit file is not stored in one convenient place.  Private companies acting as credit reporting agencies are permitted by law to maintain credit files but they also must give you access to your file free of charge.  They will happily send you your credit file if you are willing to wait, but usually charge you to access your file immediately (how considerate).  They usually provide a service to update you whenever there is a change to your file, for a fee of course.  Australia has three credit reporting agencies in order from largest to smallest:

• Veda
• Dun and Bradstreet
• Experian

Follow the links to find out how to access your credit file at each agency.  Start at the top: Veda has been in Australia for the longest and has the largest database, Dun and Bradstreet has been acting as a reporting agency for about 10 years and Experian is the new kid on the block and has only been active for a couple of years although they are a major player worldwide.

What do I look for in my file?

First of all be on the lookout for anything detrimental like a past default, bankruptcy or court judgement. These will have a devastating impact on your prospects for obtaining a loan or even a mobile phone on a plan.  It is not unknown for a default to be falsely recorded and you of course have every right to dispute the recorded information.  Secondly check the enquiries and file accesses listed and make sure that you can understand why each is there.

A lender can only access your credit file with your permission so there shouldn’t be any file accesses that you can’t account for. A large number of credit enquiries will increase the risk level a lender will assign to you.

Be on the lookout for possible identity theft. 

Importantly, an unexplained file access could be the first indication that you are a victim of identity fraud.  An identity fraudster will use your identity to take out loans they have no intention of paying back, leaving you with the consequences.  Monitoring your credit file is one of the most effective measures you can take to detect identity fraud.  Catching an anomaly on your credit files early should be enough detect the fraud before it does serious financial damage:  the longer it takes or you to become aware that you are a victim, the more damage and the harder it is to rectify.

 

Privacy legislation in Australia permits credit reporting agencies to create credit files on Australian adults.  There are clear regulations about the information that can be stored, who can access it, how it is corrected, and the procedures that must be in place to access or change information on the file.  Having worked for a credit rating agency in the past I can report that they do take very seriously their responsibly to protect an individual’s privacy according to the regulations: it is a major career limiting move for an employee to violate procedures around accessing credit files (not the reason I no longer work there in case you were wondering).

What information can be stored on my credit file?

Currently your credit file list any defaults you have had in the past five years, or any enquiries made on your file by a credit provider in order to assess your credit worthiness.  Also, any bankruptcies, court judgments or court summons for the purpose of collecting outstanding debts are listed for seven years.  Your full name, date of birth, and last two residential addresses are also stored to correctly identify you.  Any accesses of the file are stored but are only accessible to you or can be accessed only for administration.

How is my credit file used?

Your credit file is probably used more often than you realise.  Financial institutions providing mortgages, credit cards and other loans use your credit file when deciding whether to grant a loan.  In fact, any business that provides a product or service before being paid is a credit provider and so could in theory run a credit check.  In practice most phone companies and some utilities run credit checks.  A company can only access your credit file with your permission so check the terms and conditions if you have concerns.  Some companies have a policy of not providing credit to anyone with a bad credit history.  Mostly your credit file is not viewed by a person at all, more likely the information on your file is fed straight into a computer model which uses the information to score how likely you are to make good on your debts and a decision to grant your loan is made automatically.  One of my jobs was to create these models.

What happens if I have a bad credit history?

For some lenders that will effectively bar you from being granted the loan, regardless of how your circumstances have changed since then.  You will find it very difficult to take out a home loan if there is evidence of a bad credit history.  Some lenders on the other hand won’t even look at your credit file, but you will almost certainly pay for the privilege through a higher interest rate.  If a lender does use your credit file and there is evidence of a bad credit history at any point, you will find yourself marked as a risky prospect for a loan.  There are shades of grey, as those who have a bankruptcy are riskier than those with an unpaid default, who are in turn riskier than those with a default that was paid back in full. However, Australia has a very unforgiving system, so any evidence of bad credit will mark you out as high risk and there is very little that can be done other than waiting for the information to fall off your credit file.  This is a natural consequence of the fact that lenders have very little objective information available to them: when there is next to no information any hint something negative casts a very long shadow.  This is the major argument advanced by the proponents of the changes to the credit system and they are essentially correct.

 

Well it is if your world is the credit world.  For the rest of us life will go on pretty much like normal for a little while yet.  The changes will take a little while before they start to take effect but will effect us all in the end. And like everything, with a little knowledge and right actions, you can make sure you are not caught out by the changes and even benefit from them.

From the 12th of March 2014 the rules governing what can be stored on an individual’s credit file will be changed. Australia will move from what is called a ‘negative credit reporting regime’ to a ‘positive credit reporting regime’ more in line with most other western nations.

Just to be clear, calling the change to a ‘positive’ system is a little bit of spin on the part of the finance industry that has pushed for the change.  Lenders will be able to see more about borrowers financial circumstances than they have ever seen in the past and they will use the new information to make better lending decisions in their own interests.  However, the new system will mean that borrowers will have more power to influence a lenders decision than in the past by their own actions.

Up until now lenders have had the right to lodge a default on a borrowers credit file if they fall more than 3 months behind in their repayments.   Defaults stay on file for 5 years or more, and as anyone who has had default will tell you, this is like a black mark that all but blocks any access to money from the mainstream lenders.  Under the new rules, lenders will still be able to lodge defaults but some lenders will also lodge other information including when payments are made on time.  On time payments are like gold stars that allow a borrower to build up brownie points.  I will give suggestions on exactly how to go about building up as many brownie points as possible.  In some circumstances it will be possible for a borrower to overcome a bad credit history by a stretch of on time payments that demonstrate that the financial difficulties were just a thing of the past.