Why it's now more important than ever to pay your debts on time

Why it's now more important than ever to pay your debts on time

In 2014, the government introduced comprehensive credit reporting to Australia. This type of credit reporting has been used in the US and UK for many years. It is expected to help credit providers make better decisions about who they lend money to by ensuring they do not provide finance that is unsuitable because of:

  • Poor debts
  • Poor credit history
  • Inability to repay
  • Not meeting the client’s requirements and objectives

When someone applies for any type of finance, credit providers decide fairly quickly whether to approve the loan. They do this based on many factors – particularly the information in the application form.

Application forms tend to ask for information about a client’s current debt position and financial commitments. In the past, it has been up to the customer to disclose this information accurately, with the bank unable to cross-check this information. Now, though, comprehensive credit reporting overcomes this inability to cross-check, and immediately tells the bank what finance the customer has had and how responsible they’ve been at repaying it.

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How comprehensive credit reporting works

Under comprehensive credit reporting, banks and other lenders share the account repayment history information of their customers with credit reporting companies. The sort of information that is shared includes:

  • The name of the company the debt is held with
  • The type of the account
  • The total credit limit and the amount currently outstanding
  • When the account was opened and closed (if relevant)
  • The number of days the account is in arrears, and which months the account was more than 14 days in arrears
This information is shown in the ‘Credit Liability Information’ section of the Equifax (formerly Veda) and Illion (formerly Dun & Bradstreet) credit files. It shows two years of repayment history information. Where no payment information is reported, there is a dash or an ‘R’. Where payment information is reported, it will show a tick or a 0 where payment has been made on time and a 1, 2, 3, 4, 5, 6 or X, depending on how many days late the payment was made:
  • 1 means the payment is 1-29 days late
  • 2 means 30-59 days late
  • 3 means 60-89 days late
  • 4 means 90-119 days late
  • 5 means 120-149 days late
  • 6 means 150-179 days late
  • X means 180+ days late

Once a payment is so late that a ‘3’ appears, credit providers can begin the process of placing a default listing or judgment on the individual’s credit file. However, some credit providers will wait until later to list a default.

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How comprehensive credit reporting affects you

Comprehensive credit reporting was presented as something that would benefit Australians with a good credit history who wanted to take out new loans. The idea was they would be rewarded with lower interest rates and faster approvals, compared to customers with worse credit histories. However, as Australians are in more debt than ever and one in six are reported to be behind in credit card repayments, it now appears that this information sharing could lead to huge negative consequences for Australian consumers and the finance industry.

Initially, comprehensive credit reporting was voluntary. Few lenders took part. The big four banks avoided it, citing reporting costs. However, since 1 July 2018, the big banks and all other credit providers have been compelled to share their information, thus giving all lenders an even playing field.

Equifax have said that at present only 13 per cent of their 30 million credit files have repayment history information included in them. By 2019, they are expecting that 92 per cent of credit files will have repayment information included.

With all this new information on your credit file, it is now more important than ever to pay all your consumer debt on time. If you ever have any doubt about making a repayment on time, you should call your financial service provider’s hardship department and enter an official hardship variation.

While this may prevent you from being able to borrow again from that lender in the future, it will not impact your credit file. It will also immunise you from having negative account payment history information listed against you, as long as you keep right up to date with your new repayment arrangement under the hardship variation. Therefore, you will still be able to borrow from other credit providers when the time is right.

Dr Merrilyn Mansfield is the lead adjudicator and researcher for Princeville Credit Advocates. She is fascinated with the consumer laws that relate to credit reporting and in advocating for a consumer’s right to a correct credit report. She is in her final year of law. For more information email merri.m@princeville.com.au or call 1300 93 63 63.

Carmel Mansfield is a credit file specialist at Princeville Credit Advocates, currently working with clients to improve their credit score. She has also worked in complex case management at Princeville since 2010. She holds an economics degree from the University of Sydney and is a passionate consumer advocate.

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What is a credit file?

A comprehensive summary of your credit history from an authorised credit reporting agency.

It includes your credit details, credit taken in the last five years, any default payments or credit infringements, arrears, repayment history, bankruptcy filings and a list of credit applications (including unapproved credit applications) in addition to your personal details.

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How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

What happens to your mortgage when you die?

There is no hard and fast answer to what will happen to your mortgage when you die as it is largely dependent on what you have set out in your mortgage agreement, your will (if you have one), other assets you may have and if you have insurance. If you have co-signed the mortgage with another person that person will become responsible for the remaining debt when you die.

If the mortgage is in your name only the house will be sold by the bank to cover the remaining debt and your nominated air will receive the remaining sum if there is a difference. If there is a turn in the market and the sale of your house won’t cover the remaining debt the case may go to court and the difference may have to be covered by the sale of other assets.  

If you have a life insurance policy your family may be able to use some of the lump sum payment from this to pay down the remaining mortgage debt. Alternatively, your lender may provide some form of mortgage protection that could assist your family in making repayments following your passing.

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How much you intend to borrow. 

How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.

What is a specialist lender?

Specialist lenders, also known as non-conforming lenders, are lenders that offer mortgages to ‘non-vanilla’ borrowers who struggle to get finance at mainstream banks.

That includes people with bad credit, as well as borrowers who are self-employed, in casual employment or are new to Australia.

Specialist lenders take a much more flexible approach to assessing mortgage applications than mainstream banks.

Does each product always have the same rating?

No, the rating you see depends on a number of factors and can change as you tell us more about your loan profile and preferences. The reasons you may see a different rating:

  • Lenders have made changes. Our ratings show the relative competitiveness of all the products listed at a given time. As the listing change, so do the ratings.
  • You have updated you profile. If you increase your loan amount, the impact of different rates and fees will change which loans are the lowest cost for you.
  • You adjust your preferences. The more you search for flexible loan features, the more importance we assign to the Flexibility Score. You can also adjust your Flexibility Weighting yourself, which will recalculate the ratings with preference given to more flexible loans.

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e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

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We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

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What is an ombudsman?

An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.