Do you need to perform a credit health check before comprehensive credit reporting kicks in?
For many Australians, the term ‘credit history’ will elicit a yawn or perhaps a blank face. But given that our access to credit could shape everything from the homes we’re able to buy to the holidays we can take, it’s a facet of everyday finance that we’re being urged to better understand.
According to a new YouGov Galaxy Poll commissioned by consumer education website CreditSmart, 60% of Australians have never checked their credit report and over 30% don’t know the difference between a credit report and credit score.
The revelations come just over a month before the introduction of significant changes to the way Australian financial institutions share customer credit history, with mandatory comprehensive credit reporting (CCR) set to kick in on July 1.
According to Mike Laing, CEO and Chairman of the Australian Retail Credit Association (ARCA), which founded CreditSmart, Australians should be treating their credit report as “an asset”, particularly given that under CCR both a borrower's positive and negative history will now be taken into account by lenders.
“Australia’s credit industry is working together to provide the data that will give lenders amuch clearer picture of people’s credit history, creating a fairer system for lenders andconsumers,” he said.
“Given the significant role credit plays in our lives, it is essential that the system we use to obtaincredit is fair for everyone, so no one is unfairly disadvantaged.”
Greater transparency, richer rewards?
Typically the relationship between a consumer and their credit report has been a negative one, with CreditSmart’s research revealing that roughly 15% of Australians claim to have been denied credit because of their credit report.
Under the current system, lenders aren’t compelled to share a full picture of a consumer's credit history. This means that the ‘negative’ elements of a person's credit history, such as a default, currently make up a consumer's credit report.
But from July 1, all lenders will be required to provide a more complete picture of a borrower's history by providing ‘positive’ information, such as whether a customer has made their personal loan or credit card repayments in full and on-time, on a credit report.
According to CreditSmart, this could help younger Australians or people with little credit history, to secure a loan or source of credit.
Under the new system where credit history is more comprehensive and transparent, smaller lenders could also be in a better position to offer borrowers with good financial history more competitive rates.
According to Daniel Foggo, Australian CEO of peer-to-peer lender RateSetter, the introduction of a comprehensive credit reporting scheme will come as benefit to consumers willing to share their data.
“In most developed countries, if a consumer has been making credit card, personal loan and utility payments on time, they can leverage their good behavior, and benefit from having access to lower cost finance options,” he wrote earlier this year.
“Australian consumers will enjoy the benefits of real competition, both between and against the banks. Quickly we will move to an environment where, when thinking of obtaining finance, our first thought will be ’where can I obtain the best value’, not ’where is our nearest bank branch’.”
What about consumers with bad credit history?
With mandatory comprehensive credit reporting beginning in just five weeks, Mike Laing suggested that it is now “more important than ever” for Australians to make their repayments on time in order to set themselves up well.
But while the benefits may be clear for Aussies who are able to make their credit card or home loan repayments on time, what about those who run into trouble?
According to CreditSmart, credit history from any credit card or loan will be reflected on your credit report for 24 months, while a default will stay on for up to five years. However, even if you do have a default listed on your credit report, CreditSmart suggested that lenders will be able to see and take into account the positive action you take to repay your debt.
“The mandatory credit reporting will benefit those consumers who manage their debt well – it isn’t just about having a high credit score,” Laing said.
Check out our handy guide on credit history and credit ratings, or if you’d like to compare deals which reward borrowers with excellent credit history, check out some of these peer-to-peer personal loan offers today.