‘Credit check’ is a term that can make some people feel nervous, especially if they
have had a, shall we say, ‘chequered’ credit history.
You may have heard Australia is switching to a comprehensive, or positive, credit reporting
system.
So, what does that mean and how could this news potentially impact you?
We’ll start by looking at the old reporting system - Australia had a ‘negative’ credit
reporting system where lenders (like banks, credit unions or a mortgage broker) based
their assessments of whether to lend money or give credit to a potential borrower solely
on whether they had any negative reports in their credit history, such as missed bills
or other loan repayments, defaults or bankruptcy.
The new system, comprehensive credit reporting or ‘CCR’ was introduced by the Government
in 2014 and will become mandatory for lenders to adhere to in July 2018.
It is intended to allow lenders to better assess risk using a fuller picture on potential
borrowers’ credit history.
This includes information about the current accounts they hold, what accounts have been
opened and closed, the date they paid their debts after receiving default notices and
how well they meet their repayments.
The information will be used to decide whether to lend money, how much they will lend and
may sometimes influence what interest rate is offered, meaning those with more favourable
credit histories who pose lower risk to a lender may be in a position to secure a more
competitive deal.
This system could help people who have the means to take on a loan but may have had a
few blemishes in the past, such as missing one or two payments, to get approval for finance,
where previously they may have been denied.
So, what exactly will happen on 1 July?
You see, although CCR was recommended in 2014, some financial institutions have been sluggish
to adopt it.
This led the Government to impose deadlines - the big 4 banks must provide 50% of their
credit data to credit bureaus by July 2018 and 100% by July 2019.
So you may notice a change in your credit report once this data has been provided.
Basically, CCR could be a positive step for many consumers as it will likely make it easier
for them to demonstrate financial accountability.
Some of the possible pros include:  Comprehensive reporting gives lenders
a fairer, fuller picture of a borrower’s credit worthiness
 Recording positive borrowing behaviour could balance out any previously recorded
negative slip ups such as a missed payment  Credit scores are less likely to be significantly
impacted by one single negative event – it would take repeated missed payments or general
pattern of credit stress to impact a borrower’s credit rating.
One thing that hasn’t changed under CCR is when assessing your credit worthiness,
lenders will look at how often you’ve applied for credit and how much credit is available
to you.
Even if you’ve got a low balance on your credit card, it’s the maximum available
limit you could spend on the card that you’ll be assessed on.
If you intend to apply for a credit card or loan in the near future, it’s typically
a good idea to consider consolidating any credit cards or loans into one and reduce
any unnecessary credit card limits.
The good news is CCR will not only record when you apply for credit and loans, it will
also record when you pay off and close credit cards or loans.
Under this new credit reporting system, there are a number of steps you can take to possibly
help you improve your credit score, including: - Pay bills and make credit and loan repayments
on time - Regularly check details held by credit bureaus
by obtaining your free credit file each year - Pay off outstanding loans and credit card
debt - Maintain low or no balance on your credit
card - Lower your credit card limits
- Consolidate multiple personal loans and/or credit cards
Remember – the comprehensive credit reporting system is largely seen as a positive step
for consumers and lenders, encouraging responsible lending practices, and enabling consumers
to build a more comprehensive and positive credit report that could help them get a better
deal from their chosen lender.