What is comprehensive credit reporting?
Before comprehensive credit reporting, introduced in March 2014, Australia had a negative credit reporting system. This meant that credit reporting companies only kept records of negative credit information. When a person sought finance, lenders based their assessments on these negative items on their credit report. Lenders such as banks and credit unions could view information about a potential borrower’s credit applications, but could not see whether these were approved.
Credit reports included details of negative events on their credit history including late payments and missed payments, defaults, bankruptcies and court judgements. Positive information from the customer’s credit history, such making payments on time and paying off personal loans, were not included.
Comprehensive credit reporting (also known as positive credit reporting) makes it easier for potential lenders to get a clear and balanced picture of an applicant’s credit history. Under CCR, information about the customer’s current accounts, the accounts they have opened or closed in the past 24 months, and repayment history information, including if they had made their repayments on time.
The changes have brought Australia’s system in line with other countries, such as the UK and USA, where some form of comprehensive credit reporting has been in effect for a long time, and New Zealand where it was introduced in 2012.
Let’s consider the pros and cons of comprehensive credit reporting.
Benefits of CCR
The potential benefits of comprehensive credit reporting include:
- Positive behaviour is recorded (such as making payments over the past two years) which could offset some previous negative events, such as missing a payment. This potentially makes a person’s credit score more accurate and would make for more favourable lending decisions.
- A single negative event, such as missing a payment, could be balanced out by positive factors and not have as big of an impact. However, repeatedly missing payments, or showing a pattern of credit stress will still damage a person’s credit rating.
- People who don’t have an extensive credit history could have more information in their history concerning their creditworthiness, making it easier for lenders to make lending decisions.
- Having a clearer picture of a consumer’s credit history could make it easier for lenders to meet their responsible lending obligations and enable them to identify consumers under credit stress, possibly leading to fewer defaults and bankruptcies.
- With a more comprehensive credit history, lenders could possibly improve their offerings by tailoring products to customers, such as lower interest rates for people with solid repayment histories and credit scores.
Shortcomings of comprehensive credit reporting
Comprehensive credit reporting has potential downsides though, including:
- 24 months of repayment history is recorded, not just positive history, so a person’s credit score could go down under the new systems. For example, if a person could have several credit cards that they pay late, it could result in a lower credit score.
- Since lenders can tailor products based on the perceived risk based on CCR, people struggling with credit payments could end up paying more than other consumers.
- Under comprehensive credit reporting, credit reports show the total credit limit of credit cards held, but not the actual amount owed on them. For example, if you have two credit cards with a $2,500 limit each, it’s viewed as having $5,000 in liabilities over the two cards, even if you only owe $700 in total.
- Since not all lenders are required to participate in CCR, information provided to credit reporting agencies might not be consistent.
CCR and business lending
If you are applying for a business loan as a sole trader, your personal credit report will be used to assess your application. Even if you are a sole trader who has used finance for business purposes, it still falls under the consumer credit report if you took out the finance in your personal name or as a sole trader (using a ‘trading as’ name). This is affected by comprehensive credit reporting.
If you are applying for finance as a company, credit reports for both the company and directors are accessed as part of the decision process. For each business director, the credit report will uncover both positive and negative events for that person, which will be used in making a lending decision. The same applies to loan guarantors.
So even if the company credit report is positive, negative events recorded for directors or guarantors can have a negative impact on a finance application.