Credit reporting changes: What you need to know

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One of the biggest changes in credit reporting regime is about to hit Australia. What does it mean for you as an investor and why should you care? 
 
If you haven’t paid much attention to your credit history, you may want to now, as Australia embarks on a massive overhaul of its credit reporting system.
 
The comprehensive credit reporting changes came into effect on 12 March 2014 as a result of the changes in the Privacy Act.
 
The provision in the Act means that credit providers will be able to share a broader range of information about your credit history to credit reporting agencies such as Veda, Dun & Bradstreet and Experian than they are able to share before.
 
The changes in a nutshell

Before 12 March 2014:
A "default" is listed on your credit file for being late by 60 days or more and on the amount you owe over $100.  This stays on your history for 5 years.
 
After 12 March 2014:
A "default" is listed on your credit file for being late by 60 days or more and for amount you owe over $150.  This stays on your history for 5 years.
 
Before 12 March 2014:
Your repayment history is not listed.
 
After 12 March 2014:
Your repayment history is reported when you’re five or more days late in paying. This stays on your history for 2 years.
 
Before 12 March 2014:
Opening dates/ closing dates/ account limits are not listed.
 
After 12 March 2014:
Opening and closing dates as well as limits are now listed.

Some of these changes will make it easier to obtain loans.  Some of them will make it harder to get loans, especially the repayment history being listed.  
 
What it means to you as a borrower
The changes could positively or negatively impact you depending on how you manage your credits.
 
“Changing to a comprehensive credit reporting system will help give lenders (like us) a better overview of a person’s financial situation and reveal more about an individual’s payment habits,” explains Heidi Armstrong, CEO of State Custodians Mortgage Company. “This means that lenders can distinguish between high and low risk borrowers easily and potentially offer more competitive financial products to lower risk borrowers.”
 
David Grafton, executive general manager of credit risk and advisory services at Veda says this will mean consumers will be positively assessed for good credit performance, instead of being assessed negatively.
 
“Currently, Australia operates on a negative credit reporting system. By law, only negative information such as defaults, bankruptcies and court judgements can be held by the credit bureau. This way, the information can be used by credit providers to deny borrowers access to finance,” Grafton says.
Grafton further explains that banks today currently lack information on how many other accounts their customers have and what credit limits are attached to them. This poses a risk for lenders because they don’t get to see the full picture and don’t always know if customers are overcommitted.
 
With the new changes, banks will have a better understanding of whether a further loan would make someone even more overcommitted. It benefits the consumer because responsible lending practises prevail.
 
The credit changes are also good news for people who have traditionally been in demographics that lenders have been reluctant to approve loans for in the past.
 
This includes young people and recent migrants who, up until now, face a lot of difficulty because the banks don’t have enough information about them and consider them too much of a risk.
 
“Under comprehensive credit reporting, your credit history builds up quickly and very soon you will become creditworthy,” Grafton says.
 
Vibha Coburn, head of mortgages at Citi Australia adds that the changes could also potentially cut down on loan application times, while generally improving the whole application process.
 
“The changes will potentially reduce the amount of paperwork applicants need to provide. Lenders will be able to verify credit behaviours by collecting this information from the credit bureau rather than [the applicant].”
 
This means that when refinancing existing loans, for example, lenders may no longer have to ask to see loan statements as much of the information contained in these will be available via the credit report. This will improve turnaround times considering that delays with home loan applications are often due to outstanding statement information.
 
Protection of information
 
Coburn says the moves will ultimately see Australia move to having a partially positive credit bureau, but points out that the regulatory framework will be different to that of the US system, which some commentators have said the new changes resemble.
 
In the US, the information lenders obtain is available for marketing, but in Australia it will be forbidden. Clear guidelines are set out in the Privacy Code attached to the Act and these prevent the use of borrower data for marketing.

5 ways to improve your credit score

Veda offers a few simple steps that people can take to influence their credit report and VedaScore.

1. Pay your loans and bills on time – paying your personal loans, mortgages, credit cards and utility bills on time does matter, so overdue debts are not recorded on your credit file.

2. Do your homework before applying for credit – do your research to compare providers before making your application for credit. Making a number of applications within a short space of time will be recorded on your file and is not always looked upon positively by lenders, as it may be an indicator that you’re in credit stress.

3. Check your credit report well before you apply for credit or a loan – this may give you an idea of whether your application will be successful.

4. If you move house, notify lenders – advise lenders and utility providers of your new address so they can re-direct bills to your new address. If you don’t pay these bills, a credit infringement or overdue debt could be listed on your credit report.

5. Keep track of your credit record – proactively manage your personal credit report by regularly checking what your credit report looks like and get alerts on any changes made to your credit report. Go to www.veda.com.au
 
To read the full article, get your copy of the latest issue of Your Investment Property Magazine, out on sale now.
 

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