25 September 2019
Big changes to how your credit rating is calculated are taking effect, with lenders able to access more information about your credit history than ever before.
It has its fans and critics and has been five years in the making.
Let’s break down what it means for you.
What is comprehensive credit reporting (CCR)?
It’s a beefed-up system of information about your credit history that lenders can access via credit rating agencies.
Previously, lenders were only able to find out negative information about your credit history, like payment defaults, bankruptcies and court orders and judgements.
In 2014, the government brought in changes so more “positive” information will be included.
This includes whether you have a mortgage, your mortgage repayment history going back two years, your credit card limit and repayment history, and repayment history on car loans and personal loans.
If it began in 2014 why is it in the news now?
Because finally, the big four banks have uploaded all their mortgage data to the system.
In the past month, about 4 million mortgage accounts were fed in, meaning now 80 per cent of all mortgages in Australia are known for CCR.
As for credit cards, 15 million — or 60 per cent of all cards — have been reported.
More information will continue to be fed into the system in the coming months.
What does it mean for me?
It could mean your credit rating will change — for better or for worse.
If you defaulted on a credit card four years ago but haven’t missed a payment since, it’s likely your credit score will go up. That’s because that positive history will now be factored in, as well as that one default.
But if you have multiple credit cards that you are frequently late in paying, your score could go down.
Proponents of the system say it will make banks more able to lend responsibly (as they are required to do by law) because they will have a fuller picture of your capacity to repay.
But consumer advocates are worried it could lead to some people in financial hardship not seeking help or being locked out of credit altogether.
Gerard Brody of the Consumer Action Law Centre says there is a flaw in the system, whereby people who are struggling to make payments, but who come to a repayment agreement with their lender, could be still being marked as making a late payment.
“We think that’s unfair and actually discourages people from doing the right thing and getting in touch with their lender and coming to that arrangement,” he said.
Lenders having more information about your credit history could also lead to more variability in the interest and fees they charge.
People with good credit histories could eventually get a discount and those with bad credit may be charged a “risk premium”. While this might sound like good news if you’re someone who never misses a repayment, Mr Brody worries this could put some already disadvantaged Australians in a worse position.
“I think there are real fairness questions about whether it’s right that the people who are doing it most tough in society are going to end up paying more for credit,” he said.
What can I do to improve my credit score?
Geri Cremin of CreditSmart.org.au — an education website run by the Australian Retail Credit Association —says your credit score can be improved by making sure you hit all your repayments on time.
And if you can’t, talk to your lender about it.
She also says that because CCR only shows your credit limit, not your actual amount owing, lenders view that limit as your total amount of liability.
So, if you have five credit cards each with a credit limit of $5,000, lenders will calculate your total liability as $25,000, even if you only owe $3,000.
Reducing this liability could increase your credit score.
“That’s why we talk about reassessing the credit you have and whether you need it,” Ms Cremin said. “If you’ve got a credit card in the bottom drawer that you’ve never actually used, you might be able to close that.”
How much does my credit score matter?
If you’re going for a loan, lenders use your credit report as one tool to determine your suitability, so it is important. But Ms Cremin said the score itself did not matter as much as what was contained in the full report.
“A lender is going to look at your credit report more than your score,” she said. And she added many of the lenders would have their own algorithm for determining your appeal as a borrower, rather than using the number the credit agencies give you, so don’t focus too much on that one number.
Can I stop my information being shared?
Nope. By law, the big four banks must share their CCR data.
Understanding more about money
It is optional for smaller banks and other lenders to share their information, but most are. What you can do is go to one of the many places that let you check your credit report for free and make sure your detailed credit report is correct. If it’s not, then get in touch with your lender to make sure they correct the record. Under CCR you have a 15-day grace period before a missed payment goes on your record. So act fast to make sure you don’t get a black mark.