The future has arrived. And borrowing money will never be the same again.
As of 1 July 2019, Australia’s big four banks will start fully implementing a system known as ‘comprehensive credit reporting’.
So what is comprehensive credit reporting?
Comprehensive credit reporting means that when credit providers supply credit bureaus with information about how their customers are managing loans, they supply both ‘positive’ and ‘negative’ information.
What are credit bureaus?
Credit bureaus, also known as credit reporting agencies, are companies that collect and analyse data about how Australians manage loans. The three main credit bureaus are Equifax, Experian and Illion.
In the past, banks and other credit providers supplied only negative information – such as when customers missed repayments or defaulted on their loans.
But as of March 2014, credit providers have also been able to supply positive information – such as when customers make repayments on time and pay off their loans.
Comprehensive credit reporting is regarded as a more accurate system, because it paints a more detailed picture of how Australians manage loans. It also gives people the chance to balance out one negative event (such as accidentally forgetting to pay a bill) with lots of positive actions (such as paying lots of bills on time).
What are credit providers?
Credit providers are companies that provide credit (or loans). The main ones are banks, credit unions and building societies. But telcos, internet providers and power companies are also credit providers, because they let consumers buy now and pay later.
Wait, so if comprehensive credit reporting started in March 2014, what’s changing as of 1 July 2019?
Well, even though comprehensive credit reporting started five years ago, it wasn’t mandatory.
In other words, a lot of credit providers – including the big four banks – weren’t supplying credit bureaus with positive information.
Australia’s big four banks provide about 80 per cent of loans, so their support is crucial to the success of any new finance initiative.
That’s why, as of 1 July 2018, the major banks received a 90-day deadline to start supplying both positive and negative information on 50 per cent of all eligible accounts.
And now, as of 1 July 2019, the major banks have 90 days to start supplying that information on 100 per cent of all eligible accounts.
Once that happens, the comprehensive credit reporting system will reach critical mass.
Why your credit score might change
When you apply for a mortgage or a credit card or an electricity account, the provider does a background check to assess how likely you are to repay any money they might lend you.
As part of this background check, the credit provider will often ask a credit bureau for a copy of your credit file.
In the past, these credit files contained only negative information, so they provided only a limited insight into your ability to manage loans. Now, these credit files will include positive information as well, which means they’ll provide a more accurate assessment of your credit history.
Once banks and other credit providers start supplying extra data to credit bureaus, your credit score might change, for better or worse.
- If your credit score goes up – credit providers will be more likely to extend you credit and give you better deals
- If your credit score goes down – credit providers will be less likely to extend you credit and give you better deals
A credit score is a number that represents your credit-worthiness. A high number means you’ve done a good job of managing loans in the past, while a low number suggests room for improvement.
Good borrowers have been paying too much interest
The government believes this new comprehensive credit reporting system will benefit many Australians.
Back in March 2018, when the government introduced the relevant legislation to the parliament, Michael Sukkar, who was then assistant minister to the treasurer, said a shortage of data was undermining the credit system.
“It means that more loans are declined by lenders who simply cannot verify a customer’s creditworthiness,” he told the parliament.
“And it means that many loans are mispriced, leaving borrowers with good credit histories paying higher interest rates than they otherwise would.”
Mr Sukkar pointed out that Australians who had a thin credit file or a single default against their name were disadvantaged by the negative-only system.
However, the addition of positive reporting would give those people “a better chance to build and repair their credit history” before applying for a loan.
“Small-business owners, entrepreneurs and sole traders will be empowered to borrow to build their businesses on the basis of strong consumer credit histories,” he added.
Australia has a credit reporting problem
Michael Sukkar, in his March 2018 speech, described Australia as an “international laggard” in credit reporting.
“Many of our largest trading partners – including the United States of America, the UK, New Zealand and Japan – have well-established comprehensive credit reporting systems,” he said.
“On this matter, we are falling behind even developing economies such as South Africa and India.
“But movement forward in Australia has been stymied by the lack of a ‘critical mass’ of credit reporting data.
“There is a critical first mover problem at play here – without sufficient data in the comprehensive credit reporting system, there is very little benefit for any individual credit provider to invest the time and capital required in building systems and arrangements to access it.”
More data equals more competition
Mr Sukkar said the new comprehensive credit reporting system would also improve market competition.
The theory is that new players and small companies will find it easier to compete with big, established rivals if they have access to rich data sets.
“Small credit providers, including innovative fintech firms and new entrants, will be better able to serve customers and assess the lending capacity of potential borrowers,” he said.
“Placing smaller lenders on a more level playing field with the major banks, in respect of access to credit information, will drive competition in the consumer lending market.
“Greater competition in the lending market should benefit consumers, by being offered greater access to finance and better pricing.”