Credit Reporting Changes

Most of the recent changes to the Privacy Legislation were in relation to Comprehensive Credit Reporting (commonly known as Positive Credit Reporting). Below we give a brief explanation of Comprehensive Credit Reporting. You should keep in mind that Lenders may use the Comprehensive Credit Reporting in assessing your clients application for finance. Information in the Credit Report may have an impact on Credit Scoring. The Lenders may also be able to compare information in the Credit Report to information on the application. Full disclosure by your clients will be (and always was) very important going forward.

Your clients will be able to order their own Credit Reports (or where you have the process in place you can order them on their behalf and with their authority). You will then be able to compare the report to the information the client has given you.

Please note at this stage we have had no guidance from Lenders as to how they use the Comprehensive Credit Reports.

Comprehensive Credit Reporting:

Previously in Australia the Credit Reporting Agencies (eg: Veda and Dunn & Bradstreet) recorded limited detail on borrowings, company directorships, etc, and detailed any defaults or judgements. It was useful to see if someone was potentially a bad credit risk (Negative Credit Reporting), however was not really designed to identify ‘good’ credit risks.

With Comprehensive Credit Reporting, more information is gathered and then analysed to give you a score and ranking. Your score is calculated based on the information held in your credit report at a given point in time. Your score is dynamic and predicts the likelihood of an adverse event, like a default, being recorded on a credit report within the next 12 months. Your score shows where you sit in relation to other credit-active Australians in the credit-reporting database. This may be used by lenders as part of the credit assessment process; however, lenders will also use their own criteria and policies when assessing an application, not only the credit score.

There are a number of key contributing factors that are taken into consideration when generating your score:

Type of credit provider

The type of credit provider making an enquiry on your credit report may impact your score. E.g. there may be different levels of risk associated with approaching a bank, store finance provider, hire-purchase and utility company for credit. What’s more, research shows that there is a different level of risk associated with lenders in particular industries. E.g. a non-traditional lender may have a different level of risk than a bank or credit union.

The type and size of credit requested in your application

Both the type of credit and size of the loan or credit limit you have applied for in the past can have an impact on your score. E.g. mortgages, credit cards, personal loans and store finance may carry different levels of risk.

Number of credit enquiries and shopping patterns Every time you apply for credit and a credit provider obtains a copy of your report, an enquiry is added to your credit report. This can include any loan, mortgage or utilities applications you may make. Shopping around for credit and applying to a number of different credit providers within a short space of time may negatively impact your score. It flags you as a greater risk than infrequent applications for credit with a few credit providers.

Directorship and proprietorship information Directorship and proprietorship information on a credit report may impact your score. If you’re a director or a proprietor it’s important to check the individual and commercial sections of your credit report.

Age of credit report The date your credit report was created may impact your score. E.g. a relatively new file may indicate a different level of risk than an older report.

Pattern of credit enquiries over time The spread of activity over the credit report’s life to date can have an impact on your score. E.g. a relatively new credit file with many enquiries may represent a different level of risk than an older file with only a few credit enquiries.

Personal details Your score takes into consideration personal details such as age, length of employment and length of time at your current residential address to assess risk.

Default information Default information in your personal or business credit report such as overdue debts, serious credit infringements or clearouts may negatively impact your score, while a lack of default information in your file may positively affect your score.

Court writs and default judgements A court writ or default judgement on a credit report is an indicator of increased risk and may negatively impact your score. Conversely, a lack of court writ or default judgement information would indicate a reduced level of risk.

Commercial address information Information such as location and the length of time you have resided at your current business address is a measure of stability and may impact your score.

Your score is displayed as a number as well as a percentile range, showing where your score sits in relation to other credit-active Australians held in a credit reporting database. The scores (which you’re compared to) are reviewed regularly, and adjusted where necessary to account for population and economic changes. To provide you with an understanding of where your score sits compared to others, a risk grade is used:

Below Average (Bottom 20%):

Based on history, scores in this category indicate that an adverse event such as a default, court judgement, personal insolvency or similar, is more likely to be recorded on a credit file in the next 12 months when compared to the average credit active Australian population.

Average (21% - 40%):

Based on history, scores in this category indicate that an adverse event such as a default, court judgement, personal insolvency or similar, is likely to be recorded on a credit file in the next 12 months when compared to the average credit active Australian population.

Good (41% - 60%):

Based on history, scores in this category indicate that an adverse event such as a default, court judgement, personal insolvency or similar, is less likely to be recorded on a credit file in the next 12 months when compared to the average credit active Australian population. In other words, the odds of no adverse events occurring on your credit file in the next 12 months are better than the average population odds. Hence this score has been classed as the good population grade.

Very Good (61% - 80%):

Based on history, scores in this category indicate that an adverse event such as a default, court judgement, personal insolvency or similar, is unlikely to be recorded on a credit file in the next 12 months when compared to the average credit active Australian population. In other words, the odds of no adverse events occurring on your credit file in the next 12 months are more than 2 times better than the average population odds. Hence this score has been classed as the very good population grade.

Excellent (81% - 100%):

Based on history, scores in this category indicate that an adverse event such as a default, court judgement, personal insolvency or similar, is highly unlikely to be recorded on a credit file in the next 12 months when compared to the average credit active Australian population. In other words, the odds of no adverse events occurring on your credit file in the next 12 months are more than 5 times better than the average population odds. Hence this score has been classed as the excellent population grade.

There are a number of variables taken into account to determine a ‘score’. It is not possible or advisable to tell you what a ‘good’ score is as this may change depending on how the rest of the credit active population scores. E.G. a certain score today may see you at 62% (Very Good), whereas at other times the same score may see you at 59% (Good). Where you rate % wise is probably more important than a ‘score’.

The information in this email is meant for general information purposes only.

Please click on this link to http://www.veda.com.au/ for further information and credit reports from Veda