Last week new credit reforms were introduced to Australia which are based on a positive credit reporting system already adopted by several other countries such as the US and UK.
These will allow credit providers access to more information about prospective borrowers’ financial situations, including dates of when accounts were opened, number of accounts open, their credit limits and repayment history.
Michelle Hutchison, Money Expert at finder.com.au said the reforms are expected to shake up Australia’s banking industry.
“It’s a big change for Australia’s banking industry and this is only the beginning. More changes are likely to be rolled out in the future to mimic other countries’ banking legislations.
“However, this round of reforms is likely to take a while before they’re fully in place by all credit providers. That means it will give prospective borrowers some time to work on getting their finances in order before they apply for their next loan or credit card.
“But they shouldn’t wait too long! Some lenders have been reportedly reviewing their lending criteria for a while in the lead up to March 12.”
Mrs Hutchison said the reforms are a move towards ‘risk adjusted lending’, which could negatively impact loan applicants with a bad credit history.
“Currently, interest rates are generally based on a ‘single pricing’ model – particularly home loans – which averages an interest rate for a particular loan size based on the lender’s experience with good and bad borrowers. With access to more information, lenders can use a risk adjusted model to base interest rates on an individual’s credit behaviour.[sam id=37 codes=’true’]
“While this might be a fairer way of setting interest rates, it could push more borrowers who are deemed to have a bad credit history, into higher rate loans.
“According to the finder.com.au database, variable home loan rates range from 4.49 percent up to almost 9 percent. The difference between these rates for a $300,000 home loan with a 30-year term is about $860 in monthly repayments.
“There’s also a risk of more predatory lending, which lower income earners with poor credit files will be most at risk.
“And in the US, banks advertise their home loan rates based on ‘excellent credit’ which is something Australian lenders could adopt. This could make interest rates less transparent for borrowers who don’t know their credit file status, which is why it is so important for Australians to know their credit file and work on improving their financial status,”
Other ways that the new credit reforms could impact borrowers include more aggressive marketing by lenders, credit bureaus reselling the information they collect, and greater risk of privacy breaches and accuracy of the information collected.
What should borrowers do?
The introduction of comprehensive credit reporting means that keeping a clean credit file will now go beyond just paying back your loan.
Consumers need to make sure they are aware of the changes coming into effect on Wednesday and work on improving their financial situation such as reducing their credit limits and their debts before they apply for their next credit card or loan.
Michelle Hutchison’s tips for keeping a clean credit file
✓ Pay your bills on time: Any positive repayment history can offset negative marks on your credit file and may help you access credit later on
✓ Focus on reducing your debts before increasing your credit: this could not only help you get your application over the line, but will leave you in a better financial situation before you take on more debt
✓ Don’t open and close credit accounts too often: this can appear to be financially irresponsible behaviour to lenders
✓ Order a copy of your credit file and check for errors: Looking at your credit file can also give you an idea of your current financial position.
Below is an infographic fact sheet that outlines the credit reform changes.
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