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Push for positive credit reporting may change personal credit cards and loans application success

Monday January 11, 2010

Credit files, or credit reporting, play a major role in the overall success of an individual's financial life with their credit file used to either approve or reject any credit cards or loans applications. As a result, the information contain within this file is crucial and up for debate in Australia.

Back in 2004, Dun and Bradstreet started their campaign to reform Australia's credit reporting system when they entered the credit market. They have since made a submission to the Australian Law Reform Commission Inquiry into credit reporting in Australia.

Dun and Bradstreet clearly state that they believe Australia's "negative" credit reporting system is outdated that provides an incomplete picture of a potential borrowers actual financial risk score when applying for loans or credit cards.

As it stands now, the current credit reporting system only contains information pertaining to basic facts of the individual (name, birth date etc) along with the number of applications they have made regardless of whether they were rejected or not, any defaulting or bankruptcies and bill repayments.

Under the proposed changes, an individual's credit file would now contain any information on any application approval and acceptance (including type of account), the credit limits on credit cards, the date a credit account is opened and with which lending institutions.

The listed benefits, according to Dun and Bradstreet, when it comes to positive credit reporting are:

  • Reduce default rates
  • Improve access for under-served demographics to the mainstream credit system
  • Greater market competition
  • Enhance responsible lending practices

Dun and Bradstreet state that under these new changes and additional information, the lender would receive "information that is critical to a lender when assessing future credit applications for a consumer".

"This type of comprehensive credit report (positive credit report) would allow lenders to know not just if a consumer had previously defaulted but whether their existing credit obligations put them at risk of future default and / or whether a new credit facility is likely to cause undue financial stress." According to a release from Dun and Bradstreet.

When the proposed changes were first raised, ANZ released a submission to the Australian Law Reform Commission outlining ANZ's position when it comes to the issue of positive credit reporting. Within this report ANZ stated the benefits of the proposed changes while also highlighting the potential drawbacks of such a system.

Those drawbacks covered included:

  • Protection of privacy and controls over data access and usage
  • Data reciprocity
  • Data quality
  • Complaints handling and dispute resolution standards
  • Governance and oversight framework

Overall ANZ stated that positive credit information would allow lenders to make "better credit decisions" although it did not believe that there was any consistent evidence to support this (as of June 2007).

However the Dun and Bradstreet submission addressed this question of supporting evidence by referencing global research that they claim show that other economies that apply this system have "led to a dramatic drop in default rates; and improved credit pricing for consumers who would otherwise be forced out of the mainstream credit market".

Based on this research Dun and Bradstreet have stated that they believe that if the positive credit reporting system were to be introduced in Australia, the result would also include greater opportunity for home ownership for individuals who may have previously been rejected.

Christine Christian, Dun and Bradstreet Australasia CEO, has stated in a media release that by the introduction of this additional information on people's credit reports will allow consumers to better shop around for the best deal without being penalized.

"The current Australian system can penalise consumers for shopping around for the best deal on products like credit cards", said Ms Christian.

"In the new low-rate card environment many consumers shop around for the best card before making a final decision. As credit reports can only record applications, and not approvals, lenders will often consider prior application listings as approved and accepted. This can lead to lenders rejecting future credit requests because of the unclear picture of how many lines of credit a consumer might have."

"By simply allowing reports to include information of approved and accepted applications lenders will have a clearer picture of an applicants' credit position and consumers won't be penalised for shopping around."

"Many people don't meet the traditional assessment models meaning that while they can access credit, it is often at higher rates of interest. By including some additional information which provides a clearer picture, these people are in a stronger position to demonstrate their capacity to meet repayments and accordingly can access credit with better interest rates", said Ms Christian.

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