Consumer credit insurance confusion spurs ASIC overhaul

Consumer credit insurance confusion spurs ASIC overhaul

The Australian Securities & Investments Commission (ASIC) has commenced work with representatives from the banking industry on reforming Consumer Credit Insurance (CCI) in Australia.

This type of add-on insurance, often sold with credit cards, personal loans, home loans and car loans, is intended to help borrowers meet their repayments if they lose their job, become sick or injured, or die.

But according to ASIC, CCI has long been associated with poor consumer outcomes in Australia and overseas, with many consumers being unaware that they have purchased CCI, or discovering they are ineligible to make a claim on their CCI policy. When compared to other common insurance products, such as car and home insurance, consumers may receive relatively little back in claims compared to what they pay in CCI premiums.

Following prior ASIC audits of eight Australian banks, as well as ASIC’s work in relation to add-on insurance products (including CCI) sold through car dealerships, the CCI Working Group was established, including representatives from ASIC, the ABA, banks and consumer advocacy groups. The Group met for the first time on 27 July 2017, with a goal to progress a range of reforms, including a deferred-sales model for CCI sold with credit cards over the phone and in branches.

Under this deferred-sales model, consumers cannot be sold a CCI policy for their credit card until at least four days after they have applied for their credit card over the phone or in a branch, reducing the risk that a consumer will feel pressured to purchase a CCI product that does not meet their needs.

The CCI Working Group has also seen banks commit to strengthening their processes for obtaining express consent from customers who purchase CCI, and providing improved disclosure about the cost and duration of these policies. The Australian Bankers’ Association (ABA) is set to incorporate these measures into its revised Code of Banking Practice and accelerate their introduction so they commence in the first half of 2018, well before the new code is fully in place.

According to ASIC deputy chair, Peter Kell:

“Consumers should be confident that when they sign up for consumer credit insurance, they know what it is and that it suits their needs.”

“We welcome industry’s commitment to improve their sales practices and look forward to working with industry and consumer advocates on these initiatives.”

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Will comprehensive credit reporting change my credit score?

Comprehensive credit reporting may change your credit score, either positively or negatively, depending on an individual's situation.

Under comprehensive credit reporting, credit providers will share more information, both positive and negative, about how you and other Australians manage credit products. That means credit reporting bureaus will be able to make a more thorough assessment of everyone’s credit behaviour. That will lead to higher scores for some consumers and lower scores for others.

How can I improve my credit rating/score?

Your credit score will improve if you demonstrate that you’ve become more credit-worthy. You can do that by minimising loan applications, clearing up defaults and paying bills on time.

Another tip is to get the one free credit report you’re entitled to each year – that way, you’ll be able to identify and fix any errors.

If you want to fix an error, the first thing you should do is speak with the credit reporting body, which may take care of the problem or contact credit providers on your behalf.

The next step would be to contact your credit provider. If that doesn’t work, you can refer the matter to the credit provider’s independent dispute resolution scheme, which would be the Australian Financial Complaints Authority (AFCA).

AFCA provides consumers and small businesses with fair, free and independent dispute resolution for financial complaints.

If that doesn’t work, your final options are to contact the Privacy Commissioner and then the Office of the Information Commissioner.

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Failing to repay loans and bills will damage your credit score. So will falling behind on your repayments. Your credit score will also suffer if you apply for credit too often or have credit applications rejected.

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While many personal loans require a credit check as part of the application process, some personal loans and payday loans have no credit checks, which may appeal to some borrowers with a bad credit score.

Keep in mind that even if a loan is available with no credit check, the lender will likely want to confirm that you can afford the repayments on your current income.

How do I know if I've got a bad credit history?

You can find out what your credit history looks like by accessing what's known as your credit rating or credit score. You're also able to check your credit report for free once per year.

Is it hard to improve your credit score?

It can be hard to improve your credit score, as it usually requires sacrifice and discipline, but hard doesn’t necessarily mean complicated. Some simple ways you can give your credit score a boost include closing extra credit cards, reducing your credit card limit, pay off any loans and make loan repayments on time.

As a general rule, the lower your credit score, the more remedies you can apply and the greater the scope for improvement.

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Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.

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Even if a lender has no credit checks, they will usually still need to confirm you can afford to repay a fast loan on your income before they’ll approve your application.

If 50% or more of your income comes from Centrelink payments, you may find it more difficult to have a fast loan application approved. Consider checking with the lender before applying to confirm if they lend to people on Centrelink.

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If you’re unemployed, self-employed, or if more than 50% of your income come from Centrelink, consider contacting a potential lender before applying to find out whether they accept borrowers on Centrelink.

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Completing an online personal loan application can often take anywhere from 10 minutes to 1 hour. Depending on your lender, processing your personal loan application may take anywhere between 1 and 24 hours. If your personal loan application is approved, you may receive the money in your bank account the following business day, or, in some cases, the same day.

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If you’re having trouble being approved for a loan of less than $2000 and urgently need to purchase household essentials, there may be emergency loan options available to you.

For example, the No Interest Loans Scheme (NILS) allows low-income borrowers to take out interest-free loans of up to $1500 for essential goods and services.

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There is a strong link between credit scores and personal loan interest rates because many lenders use credit scores to help decide what interest rates to offer to potential borrowers.

If you have a higher credit score, lenders will probably classify you as a lower-risk borrower. That means they’ll be keen to win your business, so they may offer you a lower interest rate if you apply for a personal loan.

If you have a lower credit score, lenders will probably classify you as a higher-risk borrower. That means they might be concerned about you defaulting on the loan and costing them money. As a result, they might protect themselves by charging you a higher interest rate.

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