Australia is moving to a fairer credit reporting system that will reward people who pay their debts on time.
Under the changes, your credit report will include not just black marks such as defaults, but also positive information, such as whether you are making your repayments on time.
One lender already using this positive information, known as comprehensive credit data, to help its customers is online lender MoneyPlace.
"We knew credit reporting would be positive for our customers. Still, we are pleasantly surprised to see just how positive it has been for the majority of our borrowers,” said MoneyPlace Chief Executive Stuart Stoyan.
Delivering better rates
The move to comprehensive credit reporting means that if you regularly make your repayments by their due date, you may find it easier to access credit, and at a cheaper rate.
MoneyPlace uses customer data to provide a personalised interest rate for an online loan at the lowest rates it can offer. The more data the lender has about a customer’s credit history, the easier it is to work out the likelihood that the customer will be able to pay back their loan, and the loan can be priced accordingly.
You may have already noticed that your credit report includes some new information about your repayments. That’s because some of the bigger banks have already started feeding their data in to the credit reporting system, ahead of industry wide changes later this year.
NAB and HSBC began reporting comprehensive credit data on personal loans and credit cards in February and March respectively. All of the major banks will be required to input their comprehensive credit data in the second half of the year.
“The comprehensive data has already helped MoneyPlace to deliver lower rates to those customers with better repayment records,” Mr. Stoyan said.
MoneyPlace has found that more than 90% of its customers with comprehensive credit reporting data are now getting a lower interest rate from the lender than they would have previously, which means on average they are saving an extra $1,000 over the life of their three to five-year loan.
As well as the details in a customer’s credit report, MoneyPlace also looks at their credit score, which is a distilled version of the information in their report, to determine whether it is safe to lend to them and at what price. For customers with comprehensive credit data, it has noticed a strong increase in the average credit score since the introduction of the enhanced reporting.
Helping customers with little credit history
Comprehensive credit reporting also has the potential to help a group of customers who previously were considered ‘credit invisible’ – meaning that they lack a credit history with the credit reporting bodies.
Traditionally, because of the limited information that could be recorded on an individual’s credit report, it you haven’t recently applied for credit or a utilities service, you wouldn’t have much information on your file, so it would be hard for lenders to work out if you were a good or bad credit risk, the upshot being you may not be granted a loan, and if you did get a loan, you might have to pay a lot more for it in interest.
“With the repayment history information that is included under comprehensive credit reporting, we can see if a customer has always been on time with their repayments on any personal loan or credit card they may have had for the last few years. That could significantly increase their credit score and their ability to access more credit,” Mr. Stoyan said.
“However, it is important to realise that if people consistently miss repayments, it will negatively affect their credit score. So always pay on time, and if you can’t afford to keep paying contact your lender directly to talk about financial assistance.”