So far, we’ve looked at what happens when credit providers assess customers for finance products and what it can mean for their files held at credit reporting bodies. But what is the outlook over the next 12-24 months as credit providers change the way they make assessments?
The single biggest change is arguably the move to Comprehensive Credit Reporting (CCR), also known as positive reporting.
Disclaimer: This guide was written by Paul Abbey, Chief Risk Officer of MoneyPlace. Money Place AFSL Ltd holds Australian Credit Licence number 466327. No commercial consideration has been given between Point Hacks and MoneyPlace for the inclusion of this content on the Point Hacks website.
MoneyPlace is changing the way Australians borrow by creating an online personal loans marketplace. It’s like what Airbnb is to hotels, but with loans. Investors make money available in their marketplace, and they find credit-worthy borrowers to lend to.
What does Credit Reporting in Australia look like today?
The vast majority of credit providers in Australia contribute data to the Credit Reporting Bodies (CRB) under negative reporting rules.
This means that only applications for credit (any new credit applications, refinancing and sometimes limit increases on credit cards) are shown on the CRB file, as well as bankruptcy and if someone has defaulted on their credit commitments. In essence, to default on a credit contract means the customer has not repaid a debt.
It is important for credit providers to record this information at CRBs to make sure other providers can better understand a customer’s credit appetite but also if there were problems with the repayment of the credit facility. This is why the information is known as negative credit reporting – only adverse events are recorded.
What will Comprehensive Credit Reporting (CCR) in Australia include?
CCR will help consumers and credit providers by filling in the gaps in the credit reporting system by moving from a negative to positive credit reporting system. Updates to the Privacy Act in March 2014 means that credit providers can now start to share:
- The date an account was opened
- The date an account was closed
- What type of credit facility the account is e.g. credit card, personal loan, mortgage etc
- What the limit on the account is; and if the credit provider is permitted and elects to
- The last 24 months of repayment history information e.g. if the customer has made repayments on time, or has fallen behind for the last 2 years
What are the benefits of positive credit reporting?
This additional information will allow credit providers to better understand a customer’s financial position and make a more accurate credit assessment. For consumers, it means they can be rewarded with better rates by leveraging the extra data on their CRB file (so long as the customer has a good repayment history).
It should also mean better access to credit for consumers – studies around the world have shown credit markets expand with the introduction of CCR information.
Who is providing CCR information today?
Only a handful of credit providers are contributing positive information to the CRBs, which in turn means only a small proportion of consumers have positive data on their files.
It isn’t just fin-tech start-ups and companies that are sharing positive reporting information – some international credit providers are sharing this information too.
Who can see CCR information?
CCR works on a reciprocity basis – so a credit provider that only supplies negative information to the CRBs, will only receive negative information back, even if there is positive reporting information is available on the file.
Credit providers need the consumers consent to access an individual’s CRB file when an application for credit is made – this is typically noted in the tick boxes on an application form.
Are there problems with Comprehensive Credit Reporting?
In short, yes.
Industry participation levels
Adoption of CCR by credit providers has been the major stumbling point.
Fin-tech companies and credit providers with international experience have taken the early leadership position and are contributing information today. However, for consumers to fully benefit from CCR it requires high levels participation from across the board, including the major banks.
As for when credit providers will start to contribute data, who knows – there is no requirement for any credit provider to move to the CCR rules. Given the low level of uptake in the first 2 years, the Productivity Commission will be looking into the participation of CCR and consider recommendations for improving participation.
Balance information isn’t available
There are a number of items that cannot be shared under CCR, and one of those is outstanding balances.
This makes life for both credit providers and consumers more challenging, particularly with credit cards. Lets look at two consumers, both have a $5k & a $10k credit card shared with the CRB.
| Customer A: | Cusomer B: | |||
|---|---|---|---|---|
| Limit | Balance | Limit | Balance | |
| $5,000 | $1,231 | $5,000 | $5,372 | |
| $10,000 | $0 | $10,000 | $9,849 | |
| Total | $15,000 | $1,231 | $15,000 | $15,221 |
Two very different looking positions – Customer A uses one of their cards a bit, whilst the other isn’t used, maybe an emergency credit card – or maybe they forgot they had it. Customer B on the other hand is over their limit on one card, and approaching the limit on another.
However, both of these customers will have these positions reported in the same way on their credit files – the credit card limits will be visible, but not the balances. This could become a problem should customer A or B apply for further credit.
Without the balance information, the assessment for further credit will be flawed as worst case assumptions will need to be made by the credit provider. This usually means the assumption that if a consumer has available credit card limits of $15k, they need to assume they have a balance of $15k too. And they are only making minimum repayments.
This can mean that credit providers may ask consumers to reduce or close down credit cards or loans so that they can provide new credit to them.
Coming next: Managing your credit – our key tips
How Credit Works Series
- Part 1: The credit card assessment process
- Part 2: How loans and credit card applications could impact credit scores
- Part 3: The upcoming changes in the credit reporting system
- Part 4: Managing your credit – our key tips
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