Ask a Broker: What is Positive Credit Reporting?
In July 2018 positive credit reporting will be enforced in Australia, where so far since 2014 is has been applied on a voluntary 'opt-in' system by financial institutions Australia-wide.
Here's what Dee, one of our senior lending managers, had to say on how the changes will affect your next loan application.
What is positive credit reporting?
Positive credit data is reporting of conscientious financial conduct as well as defaults and mistakes. This will allow consumers with consistent payment history on credit contracts to be rewarded when they apply for future credit.
Positive credit data includes:
- 2 years of loan repayment history
- Any missed payments of more than 14 days
- Credit limit
- Type of credit account
- Date the account is opened and closed.
What is negative credit reporting?
At the moment, only negative data is reported on an individual's credit file. This means that when you apply for a loan, the information that the lender sees includes information like:
- Payment defaults more than 60 days overdue
- Court actions or judgements
There's no reporting that shows where you've done the right thing and been conscientious with your finances. For example, the lender won't see:
- Diligent credit card repayments
- Regular home loan or personal loan payments
How does Australia compare to other countries?
Credit bureau Experian notes that there are at least 18 overseas countries currently operating on a positive credit reporting system and that open sharing of more data creates a fairer financial system.
Countries that already used risk-based credit pricing include the United States, UK, and New Zealand. Australia is now behind the rest of the world in that only 'negative' history such as serious defaults and bankruptcies are reported.
What does positive credit reporting mean to me?
Positive data sharing of loan payment histories should benefit most Australians. For those with strong credit histories, there will be access to better interest rates and more competitive loans.
For young people entering the financial market for the first time, positive data might assist in the approval of potential first home buyers who had previously been declined due to a short credit history.
It should allow consumers to recover more quickly from adverse credit events by showing reliable payment history.
Access to credit could also become easier for borrowers seeking unsecured personal loans and business loans through peer-to-peer lenders. We'll take a closer look at these new types of loans below.
To maintain your credit rating, follow these rules:
What does positive reporting mean for banks and lenders?
First, the big banks in Australia will be required to share positive reporting data with credit bureaus. Second, banks and lenders will be positioned to make more informed lending decisions using this additional data, which should lead to fewer defaults and less outstanding debt.
NAB has pledged to begin positive credit reporting from February 2018, and the other big banks are sure to follow soon.
At the moment each bank only has detailed information about the accounts and credit products taken out by their institution. From 1 July 2018, banks and lenders will share this data. This means that a lender will be able to see 2 years of repayment data across all the other banks as well.
As we've seen with the introduction in peer to peer lending in Australia, this new reporting system will also put more power into the hands of the market, allowing development of new lending processes and products.
There's a new type of lender emerging in Australia that allows borrowers to make an offer on the interest they'll pay on a loan, and lenders can bid to supply funding.
These 'auction' loan sites allow borrowers to access lower interest rates while lenders can get a higher interest than they would with a term deposit account. Peer-to-peer lenders often have favourable loan conditions, including no early repayment penalties or exit fees.
You can access peer-to-peer lenders through Positive Lending Solutions for both business or consumer loans. With an experienced lending manager to guide you through your first peer-to-peer loan, you can benefit from products that aren't available through banks.
Both lenders and credit users will be better off under the positive credit reporting system.
In Australia, the new positive credit reporting laws will only apply to financial institutions, as the federal government considers whether it should be extended to gas, electricity, and phone service providers to allow credit providers to consider a customer's total debt before extending credit.
While digital currencies are still too volatile to challenge the existing financial market, they will more than likely form a part of the global financial market. Collaboration by Australian departments with the British Financial Conduct Authority will ensure Australia is positioned for this change.
If you're looking for more information about how positive credit reporting will affect car loans, or which lender you'd be most suited to apply with, seek advice from a car loan specialist who's across the latest lender developments and policies.