Comprehensive Credit Reporting is changing the lending landscape

— 10 min read

Big Brother has got new powers. Get your financial affairs in order before the 1 July 2018 deadline!

With all the noise around the Royal Commission into Australia’s banking industry you would be forgiven for the recent Comprehensive Credit Reporting legislation flying under the radar. But most of us with a loan out there will need to act quickly to ensure our current credit profile does not cost higher interest rates or for that matter inhibit us from future borrowings.

The Turnbull government has introduced a new form of consumer credit reporting that will bring Australia in line with most Organisation for Economic Co-operation and Development (OECD) countries. Since 2014, credit agencies such as Equifax (previously known as Veda), Illion (formerly Dun & Bradstreet) and Experian (partially owned by major banks) have been gathering some of your financial data to assess your credit risk. But from 1 July 2018, the banks will be required to share 50% of their data and this will rise to 100% by 1 July 2019.

Consider the implications of your full financial history and account conduct being accessible and shared any time you apply for finance or change utility company.

What are credit agencies?

A Consumer Reporting Agency is an organisation that collects and provides information on individuals’ borrowing and bill-paying habits. Credit information such as previous loan conduct is a powerful tool for lenders to predict future loan behaviour.

The sharing of credit information reduces the misinformation between borrowers and lenders, where now all your financial history will be recorded and shared.

What’s new about Credit Reporting?

Australia has moved from a “Negative Credit Reporting” system to a “Comprehensive Credit Reporting” system. Previously, lenders would base their assessment of a potential borrower solely on whether there had been any negative notations in their credit history such as defaults, judgements or bankruptcies.

Now, lenders will have access to a deeper set of data which arguably would encourage competition for customers and small businesses with positive credit histories. The new credit reporting rules will improve the capacity of lenders to meet their responsible lending obligations as they will have a more holistic overview of your financial commitments and your conduct of paying them. Credit reports will now include information about current accounts you hold, what accounts have been opened and closed and how well you are meeting all your loan and credit card repayments.

Proposed Benefits

For some prospective borrowers, this new reporting may provide them with a chance to be considered for a loan that they would otherwise be knocked back for because of the extra data lenders have at their disposal. It may also allow lenders to identify credit stress or over-committment at a much earlier stage, leading to fewer bankruptcies and bad debts. For others, it may afford a better interest rate on their next personal loan, credit card or mortgage because lenders are privy to all this information and can “price for risk”.

Possible drawbacks

Many consumer groups believe that lenders would maintain their current interest rate margins for customers with a better credit file, and increase the rates for those who have been through past difficulties under the guise of being of lesser quality or higher risk. This normally affects customers who can least afford to pay higher interest rates, saying that it exacerbates their problems.

Consumers with past defaults or bankruptcies generally already pay a higher annual interest rate than consumers who don’t through non-conforming lender loans. Arguably however, lenders can now also view poor credit repayment history (before reaching default status) and consider the client a riskier/“bad” credit risk and either decline their loan or price it appropriately according to perceived risk.

Additionally, unbeknownst to most, decision-makers in areas that are unrelated to consumer credit, such as employment screening and underwriters of property and insurance also depend on credit records as such records have predictive value.

It is also interesting to note that under present “negative” reporting, only about 10 percent of credit agency revenue comes from consumers. The rest is from selling data to banks, marketers and businesses. With comprehensive credit report, lenders can now market suitable products to their desired target market more effectively.

Other critical implications – your debts also include outstanding tax payments to the ATO

From 1 July 2017, the ATO with its new unprecedented power can also disclose to Credit Reporting Agencies the tax debt information of self-employed customers and businesses that have not effectively engaged with the ATO to manage those debts.

The ATO is owed $19b in overdue tax, approximately two thirds of which is owed by small businesses with turnovers under $2m so it is no wonder the Government wants to reign in overdue tax and improve the transparency of taxation debts. The credit reporting is initially only applied to businesses with an ABN and tax debt of more than $10,000 that is at least 90 days overdue but this may change.

The ATO has a delicate balance of collecting tax arrears without (where possible) suffocating the cash flow of the business. Historically, ATO debt is pushed to the back of the queue for most businesses as the consequences for failing to pay the ATO did not have a large impact on the day-to-day operations of a business. Interest charge penalties or imposing personal liability on business owners do not restrict a business to continue trading.

But now, defaults being recorded on a taxpayer’s credit file will have immediate and lasting consequences as there are black marks lasting five years. Support from lenders may be withdrawn and supplier credit may be stopped as a result.

Engagement with your Accountant and the ATO to manage unpaid tax is paramount. You will be risking a bad credit report if you try to buy more time to trade out of your tax liabilities.

So what to do?

1. Pay your bills on time – always, and with no exceptions

Direct debit is a great option to avoid having to remember when bills are due. Remember, both ‘good’ and ‘bad’ repayment behaviour is shared with the credit bureaus under Comprehensive Credit Reporting. Missed payments greater than 14 days get recorded.

2. Forward planning your projected 12 months of tax obligations

Don’t wait until the end of the financial year to liaise with your Tax Consultant. In many instances you can obtain funding in advance to assist you with your projected cash flow/tax obligations throughout the year. It is harder to borrow from the banks when your ATO portal shows tax outstanding.

3. Regularly check your details held by the three credit bureaus

Consumers are entitled to a free copy of their credit file once a year, and it is vital to check the accuracy of the information. The report will list all credit enquiries, current/past addresses, any defaults/bankruptcies and in some cases positive reporting data too.

Free credit reports can be ordered via Equifax, Dun & Bradstreet, and Experian.

4. Protect your credit report

Your credit file is an incredibly important and valuable asset – identity theft (where a person uses your personal details to fraudulently apply for credit, in your name) is a growing trend across Australia. Be aware of how much information you provide to social media websites (e.g., date of birth, addresses, etc.) as well as taking care of physical IDs like a driver’s licence as this can help aid a fraudster to assume your identity.

5. Lastly and arguably most importantly, be honest and critical with your lifestyle spending and do not overextend yourself on credit

It’s all happening and very soon. If you are concerned about your current lending arrangements or your credit report, talk to one of our Lending or Tax specialists who can help. Call 1800 376 376 or book an initial obligation-free consultation.

* The information contained in this site is general and is not intended to serve as advice. DPM Financial Services Group recommends you obtain advice concerning specific matters before making a decision.

Authors

Eyal Judah

Consultant
Melbourne

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Eyal joined DPM with over 18 years’ experience in corporate, business and retail finance. He has previously worked as a senior lending manager at Bank of Melbourne as well as a business banking manager at NAB’s Major Client Group division. With a wealth of industry knowledge and a passion for property and finance, Eyal believes that customer centricity and advocacy is paramount.