Treasurer Scott Morrison announced at the May budget that credit history data would be shared across both big banks and 2nd tier lenders, and has confirmed at a business summit in Melbourne yesterday that the changes will come into effect in July 2018.
The Turnbull government been has focused on removing the big four bank oligopoly and giving smaller lenders and consumers a fair go. Credit history reporting was a strategic move to divert attention from the Labour and Greens pushing for a royal commission into the financial services.
“In the budget this year I committed to mandating comprehensive credit reporting if lenders did not reach a threshold of 40 per cent data reporting by the end of the year,” Mr Morrison said yesterday. “But it is clear that this target will not be met as only a negligible volume of data is currently being reported in the existing voluntary comprehensive credit reporting scheme.”
The big four banks will now be required to mandatory credit reporting from July 2018, which will boost the amount of information available in credit files, including home loan limits and repayment history.
Risk rating contributes to home loan interest rates
A large element of a borrower’s home loan interest rate is based on the risk rating, and without sufficient credit data to assess if a borrower is a high or low risk applicant, a percentage buffer is applied to the home loan interest rate. More data in the hands of 2nd tier lenders including credit unions will allow them to better assess a borrower’s risk and enable them to offer discounted interest rates to those who pay on time.
“This will be a game-changer for both consumers and lenders, and will lead to greater competition in lending and, naturally, provide better access to finance for Australian households and small businesses,” Mr Morrison says. “They will then be able to offer interest rates that undercut the major lenders without the fear of defaults weighing heavy on their decision making.”
How banks share credit data now
The Financial System Inquiry in late 2014 endorsed the use of Comprehensive Credit Reporting (CCR), and at the time, only three credit providers shared information under the CCR scheme, none of which are major banks.
Lenders will always run a credit history report on the borrowers and review the credit score. However, this report will only show credit issues like late payments and defaults. Consumers who have an excellent credit history, pay on time or in advance, currently receive no benefit for good credit behaviour.
Your credit score is now more important
In preparation for mandatory credit reporting coming into effect next year, you should check your current credit score and rectify any adverse issues.
Here are some ways you can improve your credit score:
- Speak to a credit repair expert to help remove any incorrect defaults on your credit file
- Don’t shop around for credit, each credit enquiry leaves a black mark on your credit report
- Never overdraw your credit card
- Pay your credit card balance each month
- Keep a stable employment history
- Ensure loan payments are made on time
- Pay off any defaults on your credit file
- Show regular savings