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.
A key component that lenders use when determining whether you are approved for a loan, and how much you can borrow, is your credit report, which sets out your previous credit applications and any defaults on your payments.
Australia is currently moving to a new system of credit reporting that will be fairer for both consumers and lenders.
What is changing?
Following industry-wide changes, your credit report will soon show a much more comprehensive picture of your credit health and your ability to pay your debts.
Your credit report is compiled by a credit reporting body and used by banks and other lenders when you apply for credit to assess your ability to pay it back.
In the past, your credit report included whether you had a default—meaning you had fallen more than 60 days behind with a repayment— but now it can also tell lenders how much debt you have, how well you pay your accounts and that you manage your debt responsibly.
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.
Benefits for consumers - Rewarding good credit behavior
Under the new system, consumers who have been diligent in making their repayments on time may be able to borrow more money, and at a lower interest rate than before.
Lower income earners may be able to borrow from mainstream lenders who offer better rates than the non-mainstream lenders they may have had to borrow from in the past.
People with little credit history previously 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.
Another major advantage of the new system is that it need not be a disaster anymore if you have a default. 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.
In these ways, people will be better rewarded for good credit behaviour.
Benefits for lenders - Supporting responsible lending
Access to comprehensive data will help lenders lend responsibly and more accurately price their loans.
Extending credit to an individual who is already under financial stress and having difficulty keeping up with their repayments on their existing debts, risks making their situation worse.
In the past, customers could hide information about their loans and repayment history, and it was difficult for lenders to get a true picture of their financial situation.
The new system will help lenders to identify when customers are credit stressed or over-committed before extending further credit, leading to fewer bankruptcies and bad debts, and potentially reducing the rising problem of over indebtedness in Australia [i].
What should I do?
Your credit report is an asset and should be treated as such. Check on it regularly. Everyone can obtain a free copy once a year from one of the credit reporting bodies.
You may have already noticed some changes to your credit report, as some lenders have begun to input comprehensive data into the system. You may see new information appearing, such as repayment history. If you see anything wrong with your credit report, you can contact your lender or a credit reporting body, so that any errors can be corrected.
You can check your credit score, monthly, through one of the various free credit score websites. Your credit score is a numerical expression of your credit health based on the data in your credit report. The credit score websites also show a summary of your credit report.
However, be aware that individual lenders will have their own way of calculating credit scores, which will take account of other information such as your income, and the size of the loan you are applying for. The credit scores obtained through those websites 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.
[i] Household Income and Wealth, Australia, 2015-16, Australian Bureau of Statistics.