Comprehensive credit reporting is about to reach critical mass

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.

What’s changing?

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.”

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Learn more about home loans

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.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

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. 

How often is your data updated?

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

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.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002

What is 'principal and interest'?

‘Principal and interest’ loans are the most common type of home loans on the market. The principal part of the loan is the initial sum lent to the customer and the interest is the money paid on top of this, at the agreed interest rate, until the end of the loan.

By reducing the principal amount, the total of interest charged will also become smaller until eventually the debt is paid off in full.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

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.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Do other comparison sites offer the same service?

Real Time RatingsTM is the only online system that ranks the home loan market based on your personal borrowing preferences. Until now, home loans have been rated based on outdated data. Our system is unique because it reacts to changes as soon as we update our database.