Research out today from consumer education website, CreditSmart, has found that Aussies’ knowledge of credit reporting and their own credit history is worryingly low.
Around 1 in 6 Aussies claim to have been denied credit because of the contents of their credit reports.
Yet 60% of those surveyed have never even tried to check their credit report and half of those surveyed are completely unaware of what lenders even look for in a credit report, when they apply for credit.
The research, undertaken by YouGov Galaxy, was done ahead of the upcoming changes to the credit reporting system.
From July 2018, the four major banks will be required to share 50% of customers’ data to ensure a complete picture for lenders. However, a huge 83% of Aussies are unaware of the upcoming changes to the current credit reporting system, despite some lenders already going live with CCR.
Rewarding good credit behaviour
Australia is behind the rest of the world in having only ‘negative’ credit history, such as defaults and judgements reported at present.
Mike Laing, CEO and Chairman of ARCA, which founded CreditSmart, said moving in line with the UK and US, consumers’ credit reports are starting to show a much more comprehensive picture of their credit health and ability to pay back debts.
“Australia’s credit industry is working together to provide the data that will give lenders a much clearer picture of people’s credit history, creating a fairer system for lenders and consumers.
“The new credit reporting system means it is more important than ever to make your repayments on time, as late or missed payments will show up in your credit report,” added Mr Laing.
In the past, your credit report included whether you had a default, i.e. meaning you had fallen more than 60 days behind with a repayment. However, your credit report will soon reflect more payment history information, showing a 24-month history on whether you've made your payments on time for your accounts, including, credit cards, home loans, and personal loan accounts.
People who previously had little credit history may now find it easier to get a loan, because lenders can see that they have been regular with repayments on a credit card or a home loan obtained years earlier.
Although a default stays on your credit report for five years, if you keep paying your other debts on time after the default, lenders will be able to see that you are now managing your loans.
“Your credit report is an asset, and should be treated as such,” said Mr Laing.
“Many of life’s important moments can depend on gaining access to credit when you need it, such as buying a home or a new car, getting married, or taking an overseas holiday. Given the significant role credit plays in our lives, it is essential that the system we use to obtain credit is fair for everyone, so no one is unfairly disadvantaged.
“As we move toward comprehensive credit reporting, those who have been regularly paying their debts on time need not be concerned. The new system will empower consumers with good credit health and help banks to lend responsibly, protecting the long-term financial health of lenders and borrowers alike,” continued Mr Laing.
Credit score vs credit report
The research found that surprisingly, a third of consumers don’t know the difference between a credit score and a credit report.
“A credit score is an indicator or snapshot of your credit health, derived from your credit report. It is important to understand that your credit report is the ‘heart of your credit health’,” said Mr Laing.
Individual lenders will have their own way of calculating credit scores, which will take into account other information such as income and the size of the loan being applied for.
Some websites offer credit scores which can be checked monthly, for free.
"The credit scores obtained through those websites are based on more limited information and should only be taken as a general indication of your credit health – just like taking your pulse is just an indicator of your overall physical health.
“The mandatory credit reporting will benefit those consumers who manage their debt well – it isn’t just about having a high credit score,” added Mr Laing.