It’s the 12th of March 2014….. Last week, most Australians have seen a report on TV or heard on the radio that today there are some changes being made to the privacy laws in Australia, and these changes are opening the door to a wonderful new world of Positive Credit Reporting.
We’re all going to have our very own Credit Score as a result of this change, and according to all the reports, this is going to be a really positive step forward.
The banks & finance companies (big and small), have contributed to the creation of a new website/organisation called ‘Credit Smart’ to educate us all about the virtues of the new system, and with very little fuss today the changes have become law.
Mr and Mrs Average Australian have arrived home from work to do the evening routine, totally unaware of what today’s changes might mean for them in the years to come.
The Future Has Arrived
Fast-forward 5 1/2 years, and the banks have just uploaded all our loan payments into the new system, and we all have a credit score. I looked mine up a few days ago and clearly the system is functional because there it was, my Credit Score, in all its glory, telling me how well I’ve been performing financially so far in the eyes of the ‘credit reporting gods’!
Now we have Positive Credit Reporting and Credit Scores, it’s time to ask, “How is all this going to make our lives better?”
Or maybe we should ask, “Could it be possible that Positive Credit Reporting will actually make things worse?”
TAKE CAREFUL NOTICE OF THE FOLLOWING INFORMATION: YOU MAY NOT LIKE WHAT’S COMING!
Negative Credit Reporting
Before March 12th 2014 in Australia we did not have Credit Scores. We had a Negative Credit Reporting system, where a record was only placed on your credit file if you failed to make a due payment.
If you had no negative reports against you, and you qualified for a loan, or a phone plan, or anything else requiring credit to be given, you were accepted and were offered the same deal as anyone else who also had no negatives reported against them.
Was it a perfect system? No, but it was pretty damn good!
Very rarely things would go wrong and information would end up on someone’s report that was not theirs and they would have to go to the trouble of having that information removed if it was stopping them from getting a loan or a phone or an electricity connection etc. but apart from that it was doing a good job.
What Could Possibly Go Wrong?
So, let’s start looking at HOW and WHY Positive Credit Reporting could have a negative impact on Mr and Mrs Average Australian.
- First and foremost, with Negative Credit Reporting, when someone misses a payment or two, you can bet the person or business the payments are owing to will be motivated to report the missed payments and before too long those negatives will be recorded on the negligent person’s credit file. (That’s what we had before).However with a Positive Credit Reporting system, where all the payments you DO make are supposedly going to be reported as well, there is actually no chance that all your eligible payments are ever going to end up on your credit file.
Yes, the banks have just uploaded all of our loan repayment history into the system, but they had to do that, and they actually have a vested interest in doing so (see number 3 below).
The banks and other service providers will have to report your payments, BUT there will be a lot of people who make regular payments that should or could be on their credit file that simply will not make it there.
If your Credit File is missing information it will fall on you to try to get it added and you might be very surprised at just how difficult that will be!
- With Positive Credit reporting, the problem of mixed-up information is compounded greatly when it happens because there is so much more information. If Mary Jane Smith and Mary June Smith got mixed up previously, one of them would need to have missed payments before any records were created at all, so it’s quite likely that the mix up may not create many incorrect records that need to be rectified.With the new system there will be heaps of information generated for both of them, so there is no doubt it will cause problems with their Credit Scores and of course much greater confusion when it is time to unravel a mix-up, because there will be so much more incorrect information on file that needs to be corrected.
That’s much more likely to cause problems than before.
- Before we had Credit Scores, everyone was equal. If you had no missed payments on file and you qualified for a loan you got the loan at the same interest rate as everyone else who qualified for the loan.With Credit Scores the banks will NOT be offering everyone the same interest rate. They will use your Credit Score to determine what interest rate they will offer you, so you will end up paying more with the new system than under the old system if you do not have a high score.
I went to the www.creditsmart.org.au website over two weeks ago and requested answers to the following questions that are of great concern but have NOT received a response…
- How does someone who has just left school get a credit score? If loan repayments make up a big part of your credit score, will we now have a ‘Catch 22’ situation where you can’t get a loan because you have no credit score, but you can’t get a credit score without taking out a loan? This was never a problem when we had only negative reporting. How will it NOT be a problem now with the new system?
- Will rent and similar payments be included in our credit file with positive credit reporting and if so, (for example) if I make rent payments to a friend, how will those payments find their way onto my credit file to help build my credit score? I doubt my friend is going to be thrilled about the prospect of having to report my payments every week! He/she will be busy enough without another job to do, so my rent payments may NOT end up on my Credit File like they should!How will private payments be reported to the reporting agencies?
- If two similar people had exactly the same credit history except one has a $300 credit card and pays the minimum payment each month and the other has a $25,000 credit card, pays it in full every month but missed one payment six months ago, who would have the higher credit score?
- For the same two people as above, If the person with the $300 Credit Card was living on $40,000 a year social security income and the person with the missed payment on the $25,000 Credit Card was earning $150,000 a year, who would have the higher credit score?(In both of the above situations the USA system would penalise the person with the high income who is actually the lower risk. Do we want this in Australia?)
- Does the amount of a missed payment have any bearing on your credit score or is it just that you missed a payment that matters? E.g. if you were on holidays and accidentally missed a $20 payment while you were away, would that be treated the same as missing a $1,000 payment because you did not have the money?
- How long does a missed payment stay on your credit file?
- Is it possible that people could be discriminated against because of their credit score? E.g. Consider someone with all the right qualifications for employment in a sensitive job in a bank or maybe in a high security government intelligence agency.If they have a rotten Credit Score, maybe through no fault of their own, e.g. because of a messy divorce, could they be denied employment because they’ll be seen as a risk by being vulnerable to accepting bribes or ‘tickling the till’ more than someone with a solid credit score?
(This happens in the USA. In fact, I’ve heard of people in sensitive jobs being sacked when their Credit Score plummeted due to a failed marriage and subsequent financial melt-down. Supposedly Credit Scores are not available to employers in Australia, but can we be sure that what has already happened in the USA will not happen here in Australia?)
- Experian, Equifax and Trans Union (USA based Credit Reporting Agencies) are among the data collectors/providers who are involved in our new positive credit reporting regime here in Australia. Why would we let them in here when in 2013 a USA 60 Minutes TV report gave a scathing report of how these providers ignored customer complaints, did not have functional systems to correct errors on people’s files, and had over 40 million errors – 20 million of which were serious errors?https://www.cbsnews.com/news/40-million-mistakes-is-your-credit-report-accurate-10-02-2013/1/
There are so many reasons why we do NOT want Positive Credit Reporting and Credit Scores but it is most likely too late to stop it from happening here now, so we all need to start asking questions and putting pressure on the people responsible for the introduction to make sure we do NOT have the same problems they have in the USA (some of which I fear cannot be avoided no matter how hard we try!).
Earlier this year the banks were exposed at the Royal Commission for engaging in so much rotten conduct it’s not funny, yet we the Australian consumers are getting Positive Credit reporting and Credit Scores (and all the Negatives that go with them), whether we like it or not.
In reality it seems to me that it would be more appropriate for the banks to be given an Honesty and Integrity Score, rather than the Australian people to be given a Credit Score!
About the author
David Wright is the founder of the Spending Planners Institute, a professional body that offers tools and training to finance professionals allowing them to add a unique form of life-changing cash-flow planning to their product offering.
Over the last 15 years David has been working on and off with a company based in the USA that exists because of the problems in the USA caused by Positive Credit Reporting and Credit Scores. David has insight into what could potentially happen here in Australia now we have adopted them too as a result of this experience.
To see David’s comments relating to this topic made back in March 2014 go to https://simplybudgets.com.au/will-we-regret-the-changes-to-what-information-is-stored-in-our-credit-files/.