Big changes in the way your credit score 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 in the works for five years.
Let’s break down what this means to you.
What is full credit reporting (CCR)?
This is an enhanced information system on your credit history that lenders can access through rating agencies.
Previously, lenders could only find negative information on your credit historysuch as defaults, bankruptcies, and court orders and judgments.
In 2014, the government made changes therefore more “positive” information will be included.
This includes if you have a mortgage, your mortgage repayment history for two years, your credit card limit and repayment history, and the repayment history for auto and personal loans.
If it started in 2014, why is it in the news now?
Because ultimately the The big four banks have downloaded all their mortgage data to the system.
In the past month, around 4 million mortgage accounts have been funded, meaning that today 80% of all mortgages in Australia are known to CCR.
When it comes to credit cards, 15 million – or 60% of all cards – have been reported.
More information will continue to be fed into the system over the coming months.
What does this mean to me?
It could mean that your credit rating will change, for better or for worse.
If you defaulted on a credit card four years ago but haven’t missed any payments since, chances are your credit score will go up. This is because this positive history will now be taken into account, as well as the default one.
But if you have multiple credit cards that you frequently pay late, your score may drop.
Supporters 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 more complete picture of your repayment capacity.
But consumer advocates are worried this could cause some people in financial difficulty not to seek help or be completely excluded from credit.
Gerard Brody of the Consumer Action Law Center says there is a loophole in the system, whereby people who struggle to make payments, but come to a repayment agreement with their lender, could still be marked as making payments. late payment.
“We think it’s unfair and actually discourages people from doing the right thing, getting in touch with their lender and making this arrangement,” he said.
Lenders with more information about your credit history could also cause more variability in the interest and fees they charge.
People with good credit history could possibly 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 refund, Mr Brody worries it could put some already disadvantaged Australians in a worse position.
“I think there are real questions of fairness as to whether it’s fair that the people who do it the hardest in society end up paying more for credit,” he said.
What can I do to improve my credit rating?
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 pay off all your repayments on time.
And if you can’t, talk to your lender.
She also says that because the CCR only displays your credit limit, not your actual amount owed, lenders view that limit as your total liability amount.
So if you have five credit cards each with a credit limit of $ 5,000, lenders will calculate your total liability at $ 25,000, even if you only owe $ 3,000.
Reducing this liability could increase your credit score.
“That’s why we’re talking about reassessing how much credit you have and if you need it,” Ms. Cremin said.
“If you have a credit card in the bottom drawer that you’ve never used, you might be able to close it.”
How Important Is My Credit Score?
If you go for a loan, lenders use your credit report as a tool to determine your suitability, so this is important.
But Mrs. Cremin said the score itself didn’t matter as much as what was in the full report.
“A lender is going to look at your credit report more than your score,” she said.
And she added that many lenders would have their own algorithm to determine your attractiveness as a borrower, rather than using the number the credit bureaus give you, so don’t focus too much on that number.
Can I stop sharing my information?
By law, the big four banks must share their CCR data.
It is optional for small banks and other lenders to share their information, but most are.
What you can do is go to one of the many places that allow you to check your credit report for free and make sure your detailed credit report is correct.
If not, contact your lender to make sure they correct the record.
Under the CCR, you have a grace period of 15 days before a missed payment is recorded in your file.
So act fast to make sure you don’t get a black mark.