Federal Parliament will shortly consider legislation to make comprehensive credit reporting (CCR) mandatory for the four major banks. The inclusion of repayment information helps lenders do a better job of meeting their responsible lending obligations by identifying individuals struggling to meet their commitments.
In turn it assists in identifying applicants that would otherwise not be granted credit because of defaults on their credit file who have an unblemished payment history. It also helps smaller lenders to compete more effectively with the larger players by providing them with a “level playing field” when it comes to making credit decisions.
Importantly, consumers have much to gain from the implementation of CCR in Australia. The combination of the increased visibility of positive repayment information, and the strong protections our Responsible Lending laws provide, will deliver real improvements in the outcomes for consumers.
The most unfair Credit Reporting System in the world
Short of those countries who have not yet implemented a credit reporting system at all, Australia has one of the most unfair systems in the world.
We record all of the negative information and none of the good. For consumers who have a credit problem, this effectively locks them out of the market with low interest mainstream lenders for at least 5 years while this negative data remains on their file. These individuals are then at the mercy of short term lenders who will charge them higher interest rates to meet any short term needs for credit that might arise.
In addition once I have a bad credit score it becomes almost impossible for the consumer to positively impact their score. Short of bunkering down for 5 years and waiting it out an individual has little ability to make behavioural changes that can improve their credit score. One of the most common refrains our customer service teams hear from consumers with defaults on their file is “You know all about the problems that I have had but you don’t tell anyone about the payments I am making and the improvements I have made since I had that problem.”
They are right.
That “problem” can be anything from, loss of employment, illness or injury, relationship breakdown, substance abuse or gambling addiction. People can, and do, move on from all of these problems and with the ability to report their repayments as they move on from these challenges, lenders can see their improved position, their credit score improves and new lending options open up to them.
"I used to be a CFO and I’m a great believer in the mantra of 'what gets measured gets managed', it works for my business and it should also work personally".
I used to be a CFO and I’m a great believer in the mantra of “what gets measured gets managed”, it works for my business and it should also work personally. A comprehensive credit reporting system has the greatly enhanced ability to allow the consumer to transparently understand how their behaviour links to their score and how their actions (positive and negative) can drive improvements in their credit score and the information on their credit file that lenders use to make decisions. Let’s empower people with that ability and reward people who behave responsibly with improved scores, access to credit and a lower cost of credit, the biggest expense in anyone’s life.
CCR drives down the price of credit
While CCR can improve the competiveness of smaller lenders, this is not only good news for the lender but good news for consumers as well. The addition of CCR data to an individual’s record generally but not always improves an individual’s risk score. On illion’s bureau my own score jumped around 70 points when a bank loaded positive data that showed I paid my credit card on time. All of a sudden the bureau knew something good about me.
This improvement can be translated to reduced interest payments. The improved ability to measure risk also improves the efficiency and effectiveness of lenders’ credit approval processes, generating savings for lenders that can be passed onto consumers.
Increased competition between lenders doesn’t just drive down prices but improves their ability to open new, more convenient channels to serve prospective and existing customers. It also allows lenders to provide products to new segments that may have not have been as easy to serve. In the US where CCR is far more established, new positive data from energy and telecommunications companies (not yet permitted in Australia) is opening up mainstream credit to the under-banked and under-served communities.
What is often lost in the CCR debate is that the key input for most people to have a prosperous future is to borrow to buy a house or start a business. A positive credit history is the foundation to this strategy. A strong credit reporting system using CCR data can power this strategy successfully.
I think there is a very great danger that we have lost sight of the good policy that CCR represents; on the one hand giving consumers the ability to positively influence their credit data, through their own behaviour, to increase their access to affordable credit and on the other hand generating competition amongst lenders to be able to lend responsibly to segments of the market.
In the light of a potential post Royal Commission credit crunch it is even more important to get that virtuous circle going.