As comprehensive credit reporting (CCR) becomes mandatory for the big four banks from 1 July 2018, there are potential benefits to be enjoyed by many in Australia. While these potential benefits extend to all, it is possible that prospective borrowers with a thin credit file are going to benefit the most.
What is CCR?
CCR is a move away from the negative reporting system that most lenders in Australia currently adhere to. CCR has actually been in place since March 2014, but low implementation – 24% of lenders according to Equifax in April 2017 – led to the Australian government mandating in November 2017 that it will become mandatory for the big four banks from July 2018.
With negative reporting, only personal information as well as negative credit information, such as defaults and court judgments, is visible to prospective lenders when they view an applicants’ credit file. Under CCR, far more information will become visible, including:
- If repayments were made on time, via your last 24 months payment history.
- Types of credit accounts held.
- Opening and closing dates for credit accounts.
This means that, for the first time, there will be a potential tangible benefit to those who actively make repayments on time and manage their credit usage carefully, rather than lenders simply seeing that you don’t have late payments or defaults, for example.
Which groups that potentially have thin credit files will likely benefit the most from CCR?
Building up a favourable credit history can be difficult. At present, if you’re between the ages of 18 and 21 – the Good Shepherd Microfinance website extends this to age 24 and terms this group as ‘young millennials’ – it is can be tough to demonstrate you’re a reliable payer with the negative reporting system. While your credit file may show that you don’t have any adverse credit history, lenders don’t know whether you have been exposed to or shown competence at managing credit.
With CCR, young people can take out their first personal phone contract, and potentially even a small loan or a credit card with a relatively low credit limit, and build up a history as a responsible borrower, which may enable them to access higher amounts of credit and better deals earlier than they would be able to previously.
Migrants into Australia
You can move into Australia from anywhere else in the world, have a near perfect credit history in terms of not having experienced any adverse credit events, have a well-paying job, and still find it difficult to get accepted for credit. As the Australian credit reference bureaus will hold no information about you, lenders aren’t able to make an informed decision as to whether you will prove a reliable borrower. No information equals high risk, so there’s a high chance a credit application would be declined.
In a similar manner to young people as described above, CCR will allow migrants into Australia to build up a credit file quicker, thus allowing them to get on with their lives in Australia sooner than otherwise might have been possible. For permanent migrants who may be looking at a home loan, CCR could represent a significant benefit.
Those with a Poor Credit History
As well as helping individuals who have a thin credit history, CCR could help those who have experienced adverse credit in the past to rebuild their credit history and credit-worthiness. The current negative reporting regime means that if, for example, you have a default on your credit file, many lenders will see that and automatically decline your application. However, with positive reporting, lenders will be able to see if that is a default that is three or four years’ old and has been paid, and if in the last two years you have been reliable in meeting your current credit obligations.
CCR could thus prove useful to those who have gotten defaults in the past for reasons they may not be able to control, such as being short of cash if being made redundant or having to take extended time off work due to illness, but are otherwise able to demonstrate they can manage credit responsibly and make payments on time.
Disclaimer: This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.