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FOR CONSUMERS

Access to fair and equitable credit is a core function of efficient financial markets. Any good or service consumed ahead of payment is considered to involve credit. This means that “credit” could be a monthly account with your local newsagency, your bank credit card bill or residential mortgage. Mobile phone bills, water and electricity accounts are also all credit agreements and your handling of each shapes your credit footprint.

The power of your credit footprint is set to grow as Australian Privacy Laws expand to allow additional information about your credit history and behaviour to be included in credit reports. ARCA strongly supports the industry’s adoption of “comprehensive” reporting whereby credit providers will be able to assess multiple sources of information that presents a more complete and balanced picture of an individual’s credit position.

In other countries, transition towards a more holistic view of an individual’s credit footprint has resulted in better credit practices and improved outcomes for borrowers, credit providers, and national markets. Expanding the information pool to include “positive data” such as the types and number of accounts opened, the amount of credit available and the timeliness of payments has in fact increased responsible access to credit and engaged new market segments that have previously been difficult to assess – namely younger people and small businesses.

Benefits anticipated from the move to comprehensive reporting that allows providers to collect and share a wider range of information in their credit reports are:

– Better matching of loan types and amount to borrower capacity
– Fairer access to credit loans
– Reduced consumer risk of over-extension

Under the current arrangements, a credit reporting body can include the following information in a credit file:

– Defaults;
– Judgements;
– Bankruptcy;
– a note that a credit provider considers the individual has committed “a serious credit infringement”;
– the individual’s current credit provider status;
– and details of recent credit inquiries.

The new system, that will commence in March 2014 under the Privacy Amendment (Enhancing Privacy Protection) Bill 2012, will allow for a more balanced view of a borrower’s credit capacity. It will allow for the application of five extra “data sets”, as originally proposed by the Australian Law Reform Commission in its 2008 review of the Privacy Act.

Credit reporting bodies [also known as credit bureaus] will be able to add the following information:
– the date a credit account was opened;
– the type of credit account opened;
– the date a credit account was closed;
– the current limit of each open credit account;
– and repayment performance history [information about repayment performance will only be available to licensed credit providers].

This more balanced view of a borrower’s credit capacity importantly differentiates their real credit position from one generated by aggregating their credit enquiries made while ‘shopping around’. Applying a perceived or hypothetical view of a borrower’s capacity, limited further by negative data filters can distort credit decisions where lower risk borrowers may subsidise, or worse, be denied credit in favour of riskier borrowers.

Presenting greater and more accurate information about potential borrowers to credit providers could enable:

– Interest rates to be fine-tuned to reflect the risk of the individual borrowers, such as lower interest rates for lower-risk borrowers
– Lower average interest rates or fewer interest rate increases
– Greater lending through reduced rationing
– Lower rates of delinquency and default for given economic conditions
– Increased accessibility to credit

ARCA aims to facilitate better assessment of consumer credit risk by creating greater transparency, efficiency and security in the exchange of credit reporting information.

In order to support the comprehensive credit system, the Australian Government have included additional obligations that credit providers and credit reporting bodies maintain, for the benefit of consumers, such as:

– Access requirements
– Complaints and Correction request processes
– Notifications and refusal notifications
– Appropriate disclosures