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Will Your Credit Rating be affected by the 2018 changes to Credit Reporting?

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There are new changes to credit reporting which are smashing investors right now. Comprehensive Credit Reporting. 

(Also known as positive credit reporting)

I recently had an investor with 7 properties get their loan declined because of a few missed credit card payments... From 18 months ago!

Today I’m going to show you what has changed, and how to find out if you are affected. 

Let’s jump right in. 

 

How credit reporting has changed

Positive Credit Reporting is a brand-new credit reporting system that gives Australian lenders 24-months of repayment history, and detailed account information when you apply for a loan.

From 1 July 2018 Positive Credit Reporting is mandatory for all of Australia’s big banks, and right now the major banks have 50% of their customers’ data on the system.

 


This broadly translates to having credit card data live, but by 1 July 2019, the banks are required to have all of their customer's credit card, personal loan, overdraft and home loan transaction history on the reporting system.

 

What did credit reports previously show?

Before July 2018 the information on your old credit report showed your basic credit history.

This included the static dates of when you had previously applied for credit, mobile phones or electricity services, the amount you applied for and only contained negative information like defaults or bankruptcies.

In most cases, you had to be over 90 days delinquent on your payments before the lender would register a default on your credit file…
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And what does Positive Credit Reporting show? 

Positive Credit Reporting gives lenders much more information on any credit you have (and have had) in Australia.

This includes live payment history and current snapshots of all credit (home loans, personal loans, credit cards, overdrafts) you have opened, or may have closed within the past 24 months.
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The good news is that there is a ‘grace period’ for late payments. It only reports payments that are more than 14 days overdue.  In other words, if you are 6 days late on your credit card repayment it won’t be reported onto your credit file… but if you are 15 days late it will be on your report for all the banks to see.
 
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Caption: R stand for not reported, 0 means this person was not overdue. 

 

How will comprehensive credit reporting affect getting finance? 

When you apply for a home loan the banks will now have access to 2 years repayment history across your personal loans, car loans, credit cards and home loans. (Including any accounts that you have also closed).

Under the old credit reporting system, your credit report wouldn’t show any information about how well you’ve been paying off your home loan, personal loan or credit card. So now the banks will have a much more comprehensive picture of your personal repayment history.

But if you missed a repayment 18 months ago on a credit card (that has been closed) the banks now know, and can potentially decline your application due to previous account conduct...

Why is Positive Credit Reporting ‘smashing' investors?
For the above reason.

Traditional credit scoring only told a lender if you were in default or had judgements against you - so things had to be pretty serious to get to that stage. 

Now Positive Credit Reporting shows a much more comprehensive picture.

There is no hiding a missed credit card, home loan, overdraft or personal loan repayment. 

As you can see from the example below, in the past the first three people would have been accepted under the old credit reporting system.

…But now two of them would be declined on the basis of missed payments or being ‘over-committed’.   

 
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What can investors do to prepare for these changes? 

Over 65% of Australian’s have never checked their credit score, so I suggest getting a free copy of your credit report from Equifax or MyCreditFile (you get one per year).

I would even suggest subscribing to one of these agencies Credit Alert service to protect yourself from identity fraud and know if anyone is making credit enquiries on your file without your knowledge. 

What is the likely impact on investors once Positive Credit reporting is 100% live?
In America, home loan lenders offer sharper interest rates to people who have better credit scores – and with Positive Credit Reporting this will now be a possibility in Australia.

So in the future, a better credit score could see you getting a better interest rate.

Also given lenders can see the last 24 months payment history across both your opened (and closed accounts) there will be greater scrutiny with account conduct so it’s important to tightly manage your repayments and cashflow.

And if you do have issues with your credit file, it isn’t the end of the world.

There are specialist lenders out there that do not use broad brush credit scoring, and a good mortgage broker can help you navigate loan opinions.