Good credit report history now considered by Lenders. Whats your score?
Like many Australians, Bernard Stahr didn’t know that two years of credit repayment history is about to be introduced to his credit report.
The 49-year-old public servant, from Kensington in Melbourne, wants to buy an investment property in the near future but is yet to apply for a loan.
“I’m glad that the lenders will be able to see that I’m financially risk-averse and always pay off my credit card. Hopefully, it will help me secure a loan,” Stahr says.
“I travel overseas regularly, and sometimes that involves putting costs onto a credit card, but I always pay that back when I get home.
“However, I know from the experiences of those around me how easy it is to default and how ruthless the credit bureaus are in their reporting.”
Stahr’s search for a loan comes as the federal government fast-tracks the introduction of comprehensive credit reporting by mandating that they report at least 40 per cent of their positive data by the end of this year, as recommended by a Productivity Commission report.
In the past, only defaults have only been visible on these reports. But now, lenders will be able to see positive data as well, such as if you’ve been repaying your credit card, personal loans or mortgages on time over a period of up to 24 months.
The data will also show how many credit accounts someone has open and how much the combined credit limits total. However, lenders are only able to reveal positive data if you’re actually a good saver – those not making regular payments on their credit card could be negatively impacted.
And while the move will arm banks with better information to make more informed decisions about lending arrangements, the transition to broad positive data sharing could see major changes in the credit scores of Australian borrowers, with credit scores likely to either increase or decrease for individuals.
The research, conducted by Australian credit services firm Experian, found that despite the lack of awareness, seven out of 10 said they were supportive of sharing more data with credit providers.
The survey also revealed that nearly two out of five were supportive on condition that their data is kept safe, and nearly one in three wanted to negotiate lower interest rates based on their strong financial history.
It also found that seven in 10 have hadn’t checked their credit scores before, while nearly nine out of 10 incorrectly believe that simply paying their utilities on time improved their credit score.
Experian Australia/New Zealand managing director Suzanne Steele says in the past, borrowers have had to make assumptions based on your positive behaviour by viewing your mistakes.
Steele warns Australians that about 40 per cent of the decisions about credit applications will change compared with the current system where only negative data is provided. This change in credit decision varies across approve, decline and change in rate and lending limits.
Those with a strong track record of making timely credit repayments will be better recognised by lenders, who could offer borrowers more competitive deals and interest rates, Steele says.
“From our experience in the 18 other countries where we operate a credit bureau, positive data sharing is a much fairer system. For example, positive data may help potential first home buyers who don’t have a long credit history to be approved for finance, where previously they may have been declined,” Steele says.
She predicts the banks will respond to the move toward greater transparency by introducing a range of more innovative products to lenders in the coming months.
“Positive data sharing may also enable Australians with a stronger credit history to access more comprehensive deals and interest rates and will assist others to avoid entering into unmanageable levels of debt.”
However, the change should be a warning for the financially cavalier, finance expert Sarah Riegelhuth warns.
“Young Australians need to realise that they are now more accountable for their actions,” Riegelhuth says. “There’s no real way to get around this, you’ve got to live within your means and act responsibly.”
“Young Australians hoping to borrow money need to ensure they have at least 24 months of good credit history on the record before making large borrowing requests. Pay all your bills in time, limit a number of credit applications you have open at once and always apply for a lower loan amount than what you can actually borrow.”
Steele agrees. “Now is the time to get your house in order. Australians should be checking their credit score, make sure they don’t default and be actively looking for ways to improve that score.”