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Credit Where It’s Due – Part 1

Comprehensive Credit Reporting (CCR) – Adapting Your Finances to Perform Under New Rules

Part 1 of 2

Introduction

In the age of ‘big data’, just about everything we do can be tracked. And it often is. Some see this as an invasion of privacy. Others see it as a move towards greater efficiency. Whatever your position, data transparency can work to your advantage, if you understand the system.

Perhaps nowhere is this truer than in your credit history, under the new rules of comprehensive credit reporting (CCR).

In this two-part series, we’ll explain how your credit rating is likely to change under the CCR rules. We’ll drill down into some major investing implications you may not be aware of. We’ll also look at ways you may be able to use these new rules to your advantage.

Evolution of a credit rating system – what is CCR?

Many Australians don’t realise just how much of their credit history is already available to all banks. The fact is, when it comes to approving your loans – and even deciding the interest rates that you’ll be charged –  banks and lenders are putting your financial affairs under a data-driven microscope.

Over the last few years, banks have been sharing more and more of your credit information. As of July this year, they have a vastly more complete picture of your financial history.

Since 2014, the government has been moving us towards an open environment when it comes to sharing credit data.

A watered-down version of comprehensive credit reporting (CCR) was introduced back in 2014. It encouraged financial institutions to share more of their customers’ credit data with their competitors. Back in 2014 it wasn’t mandatory. In fact, before 2017 only about 24% of Australian lenders were sharing credit information with the credit ratings agencies.

Then in November 2017, then Federal Treasurer, Scott Morrison announced that CCR would be mandatory for Australia’s ‘Big Four’ banks (CBA, Westpac, ANZ, and NAB) starting from July 1, 2018.

That was the turning point. As of July 2018, these banks would be obliged to share at least 50% of their accumulated credit data with credit agencies – and so with their competitors. This was seen as a transition period, encouraging banks to get used to the idea of sharing closely guarded secrets about their customers.

Then, July 1 of this year saw an even broader rule come into effect. Australia’s Big 4 banks must now report 100% of the credit data they hold on their customers. According to draft legislation released on 9th February 2018, banks have 90 days from July 1st of this year to submit all of the data they have on your to credit reporting agencies.

Currently, this 100% sharing is obligatory only for the 4 big banks in Australia. In the months ahead, it’s expected more and more lenders will come on board with the new system. By February 2020, Australia’s entire credit market is expected to be based on this new level of transparency.

So what’s changed under these new rules of CCR? Good question. Quite a lot. We like this graphic over at Finder for a great overview of the change.

Source: https://www.finder.com.au/comprehensive-credit-reporting

So what’s the point of these new rules?

In a nutshell, it gives lenders a more complete picture of a borrower’s credit score – particularly over the last 2 years – enabling them to calculate risk of default with significantly greater accuracy.

To some it may seem like quite an overhaul to a system that worked well for decades. But in reality, the old system was far from perfect.

Before CCR, the borrower could generally rely on statements from one existing bank account as evidence of a stable income, cash flow and fiscal responsibility. Of course that meant that they could conceal elements of their financial status that could reduce their credit worthiness. 

In fact, if you translate that to an institutional level, the Global Financial Crisis of 2008 came about because similar flaws in the old system allowed toxic debt to be marbled throughout the global economy. Years after Enron was found guilty of hiding debt in toxic companies, the whole subprime mortgage market was based on the inaccurate evaluation of millions of borrowers’ inability to service their debts.

So in light of that, there’s a lot to be said for lenders having a clearer picture of a borrower’s capacity to service their debt. Perhaps it’s no surprise that CCR is already in practice in 34 OECD member countries. CCR has long been in use in the US and UK.

When we look at the figures, Australia has much to gain from ensuring consumers don’t push their credit into untenable positions. ASIC’s recent review of Aussie credit card holders reveals that more than 1 in 6 consumers are already struggling to repay their credit card debt. The outstanding balance amounted to about $45 billion and over 30% of Australian consumers have increased their debt within the past 5 years.

The important thing is to prevent those struggling with their current repayment obligations from being part of that 30% who are taking on more debt. And a transparent system of credit does a lot towards doing that.

CCR makes it impossible to hide partial records by using multiple accounts. That means banks can exercise appropriate responsibility and risk pricing when deciding who will qualify for credit.

Looking at the big picture, we can expect that bank assets will become less risky over time, which will lower the average interest rate in the lending market.

So how do the changes affect you?

Banks have shared information on your credit worthiness for decades. But until recently, they generally only shared the negative information like defaults, late payments, failed applications and the like.

The good news now is that CCR means lenders can see the more positive aspects of your financial history too. So when you pay on time, it goes into the mix. Not too many credit cards in your wallet? That helps too.

According to research by Equifax, adding all your positive data to the mix means the chances are that CCR will actually boost your credit rating. Even if it doesn’t boost your rating automatically, CCR should make it easier for you to boost your own credit score. We’ll cover that in detail later.

The key thing to remember is this – whether you’re buying a new home or simply meeting your business’ cash flow needs: just about every recorded demonstration of fiscal responsibility can help support your application for credit.

Meanwhile every recorded demonstration of fiscal mismanagement will do the opposite.

Depending on the lender, your positive credit score may help you to get a better interest rate on your loan. Higher risk borrowers will pay a higher rate of interest, while the interest for lower risk borrowers will reflect their credit worthiness.

While the big banks may be slower to use CCR to tailor specific loan amounts and interest rates, the more agile tech lenders are already doing things differently.

Fintech lenders are crunching the numbers and offering specific loan amounts and interest rates based on the information they get from CCR.

Upshot: when it comes to your credit, doing the small things well counts now more than ever.

Finding new opportunities

This shift to transparency means that as a consumer, you could enjoy a range of benefits. These may include:

  1. CCR could help to build a credit profile quicker and recover from adverse events in your credit history
  2. It may become easier for your lender to process your credit applications. Some of the top tech lenders offer a 10 minute application, a 24 hour decision and funds available within days.
  3. You have the right to ask for any changes of incorrect data you find in your credit-reporting file – and can expect a speedy response

Beyond the basics, there are a range of details that you need to know if you’re going to make the most of these new credit rules.

For example, the fairly simple ‘Conditions related to your repayment’ that lenders are now sharing provides a microscopic level of detail about your patterns of punctuality in repayments.

Naturally if you’re in the habit of paying your debts on time this is an important indicator of credit worthiness. So lenders can now look at each specific repayment you’ve made – and how punctual you’ve been on each occasion.

In addition, as a consumer you now need to consider a range of new ‘contingent liabilities’. A whole new range of factors could affect how much you can borrow and at what rate, including things like:

  • personal lines of credit
  • unused credit cards
  • minority shareholding in a business with a loan

We’ll look in more depth at these in part two of this report. We’ll also cover some of the strategies you can employ to make sure you get off on the right foot in managing your credit rating under the new rules of CCR.

READ PART 2 HERE

Want to find out more? See how our insights could help you to structure your finances in line with the new rules. Get in touch today for an introductory consultation that’s tailored for your situation. We’ll explain what could work well for you and give you the rundown on how we could help. Then we’ll leave it up to you to decide whether we’re a good fit and how you’d like to move forwards.

Disclaimer: This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your

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