How to protect your financial reputation

PUBLISHED: 21 Feb 2014 21:32:39 | UPDATED: 22 Feb 2014 04:20:46

If you pay your credit card bill late after March 12, you won’t just get a tetchy letter from your bank and maybe a fine. Every time you miss a payment for more than five days, a little black mark goes on your credit file, and your personal credit rating ticks lower.

Loan repayment details are one of the five extra pieces of information lenders can pass on to credit bureaus from next month. A new “comprehensive” credit reporting regime will add “positive” data to the negative information that exists now.

So – just like a company – individuals will increasingly be labelled with a personal credit rating that banks will use as a quick reference for a loan, along with other detailed checks.

But instead of an AAA or a BB rating, you will have a credit score – a single figure ­summing up your borrowing and ­repayments history.

This will be big business for credit bureaus which collect data on individual and business borrowing supplied by lenders, formulate the scores based on their own proprietary methodology and then sell it back to banks and the public.

Individuals will for the first time have an incentive to actively manage their reputation and score, therefore it will quickly gain value as data – such as how often you have made repayments on time, as well as the negatives like defaults – pours into your credit file each month.

Veda Group is the dominant credit bureau in Australia. It launched one of the most successful floats of 2013 on December 6, its share price rising more than 50 per cent within two days of listing due to investor confidence in its dominance of the ­consumer credit history market.

In February 2013, UK-based Experian set up a credit bureau in Australia, backed by the big banks, in anticipation of the change.

Comprehensive reporting

Australia is virtually the last developed country to introduce a comprehensive credit reporting regime – that is, one that takes into account both “negative” and “positive” credit behaviour. So far only Veda has devised a credit score in Australia.

Another rival, Dun & Bradstreet, will be selling its own version from March. Experian will calculate a score initially based on data from other jurisdictions. But it won’t charge for it here until there is sufficient local data. Basically all three will have different ways of calculating and presenting your credit score. Under Australia’s existing negative credit reporting regime, few would want to pay up for the score because it is just based on “static” data like loan defaults and how many times you have applied for a loan – which can make you look a bit desperate in the eyes of a lender.

But comprehensive reporting will see a mass of new data pour in every month from credit providers, including whether you have taken out a new loan or credit card and whether you have paid them off, your repayments history on loans and whether any of your repayments have been late.

From March 12 if a loan or credit card repayment is more than five days overdue, this will be recorded on your credit record as a late payment. This will be escalated into a default if a payment of more than $150 is more than 60 days late.

The more information that builds up in your file, the more useful the credit score will become. Not only will the data be up to date but it will contain increased positive information – as long as you pay on time – as well as all the black marks.

Credit bureaus and lenders say this new data will allow them to more accurately assess creditworthiness, because a few minor defaults that could prevent someone getting a credit card for years now may be outweighed by years of diligent repayments.

Improved metrics

Damian Paull, the head of the Australasian Retail Credit Association – set up by the banks and credit bureaus to promote the scheme – likens the change to your CV switching from only listing the jobs you have applied for and failed to get to one that also has the jobs you win.

But he says individuals will have to get much more switched on about paying their bills on time.

“Veda says 80 per cent of consumers have not looked at their credit report,” he adds. “Now is a good time to have a look [at your credit file] and correct anything and then perhaps think about building this into a regular financial routine.”

One free copy of a credit file is allowed every year. An extra one is allowed gratis every time you’re knocked back for a loan. Paull’s suggestion is to get a copy every year when you do your tax return.

You should also exercise caution with credit cards. If you’ve taken up an offer for a new card and never used it, close the account – as well as any other credit cards you don’t use. That’s because while banks and bureaus so far have only seen whether you have applied for a credit card, from March they will also know the limit. Whether or not you borrow to the full limit, they will automatically assume you have done so. This is why it’s important to close any card accounts you don’t use.

Paull, credit bureaus and banks say the positive data will improve the ability to assess the risk of a borrower and identify those who are low credit risks but have been refused credit due to minor infringements.

But some consumer advocates are sceptical it will benefit borrowers.

Bad news for consumers?

Katherine Lane, principal solicitor at the Consumer Credit Legal Centre, says ­anything positive is far outweighed by the negatives for consumers.

She questions why the public has been told so little about the changes beyond the Australasian Retail Credit Association’s website, which went live a few weeks ago.

Lane says it will be easy for someone to breach the five-day limit (when a late payment is recorded) through no fault of their own. “Overall it will be very detrimental for consumers,” she says. “What about [those] who have little marks on their report due to a bank error or [don’t pay on time] because they are in hospital. Those people when they go to get credit are going to be mortified.”

She argues it has always been hard to correct credit files and although this process has been “streamlined”, bureaus still get a month before they have to respond to a request for a correction.

“Experience overseas is that [comprehensive reporting] doesn’t deliver giant discounts,” Lane says. It delivers “easier access to credit”, but she claims there is no real evidence that individuals unable to get a loan now will have an easier time when they apply for a loan in the future.

Steven Brown, director of consumer and risk solutions at Dun & Bradstreet, says the change is a “tremendous step forward”. But he is not entirely happy.

He says the omission of several crucial pieces of data from Australia’s regime is “an oddity” and will mean credit scores here are much less revealing and far less useful for both consumers and banks. As well as banning credit providers from supplying account balances, unlike most other jurisdictions, common repayments data – phone and utility bills – won’t be on file.

Brown argues postpaid mobile phone plans are a form of unsecured credit. These days, he says, they are the first time young people get access to credit and are therefore an early indication of their creditworthiness.

“It is one of those accounts that we all have and if people are making those payments on time as they generally always do, it is a good objective track record,” he says.

Missed opportunities

The data missing from Australia’s system is a “missed opportunity”, he says, that will make credit scores here “less useful to all of the stakeholders”. Allowing the balance on credit cards to be shown, for instance, would prevent banks from just assuming you have borrowed the full amount.

“We’ll know if they have made that required payment, but we don’t know the value of that payment.”

As well as loan repayment details, credit bureaus will also be able to see:

■ The type and amount of credit that you applied for.

■ The date you opened your credit accounts, the type of credit accounts you opened, the date a credit account was closed and the maximum amount of credit available to you under each credit account.

■ Whether monthly repayments have been paid on time over the past two years (a payment is considered late if it is more than 5 days overdue).

■ If, because of a default, you have entered into a new or varied arrangement with that credit provider (or another credit ­provider).

Is it worth paying for your score

Credit scores that give you your own creditworthiness “rating” will become valuable over time to both borrowers and lenders. But much will depend on how fast lenders feed both positive and negative data into credit files.

Credit scores can be bought, as opposed to a credit report you can request for free once a year. So far, only Veda has a credit score for sale. Dun & Bradstreet will launch its own next month. Veda sells four credit score “plans” ranging from $69.95 to $119.95 a year.

The cheapest gets you your score, a “risk ranking” from 0 per cent to 100 per cent and a “risk grade” (excellent, above average, average, and below average). As an example of what the scores mean, 994 is excellent, 707 is good, 619 is average and 352 is below average.

You’ll also get a list of factors that influenced the score, and an indication of how positive or negative they are. Premium plans include alerts when details on your credit file change and warnings when potential fraud is detected (including your details being used to apply for credit by someone else).

David Grafton, Veda’s general manager of credit risk and advisory services, says ultimately individuals should be able to go to a bank armed with their credit score and negotiate a better interest rate. In time, it should also help those with “thin credit files” such as young people or those new to Australia.

Dun & Bradstreet charges $30- $60 a year for extra alerts when information changes on your file, $30 for faster delivery of your credit file or $15 for a quick ID and credit application check.

Kim Jenkins, Experian’s Australia and NZ managing director, says she does not think credit scores will be backed by enough data to charge for them initially. “We don’t think there is a huge value proposition to a consumer,” she said. “When we know that value proposition is robust, we will charge for that.”