It is widely accepted that the Australian credit reporting platform is far from perfect, in fact the CRAA (Credit Reference Association of Australia) has described credit reporting in Australia as the most restrictive in the western world. I for one would not argue with this view point.
The good news is there are significant steps being taken to improve things and although there are no firm policy changes as yet, there are a number of positive reforms currently under consideration.
Reform recommendations are being proposed by a number of organizations such as the Australian Law Reform Commission (ALRC), the Credit Reference Association of Australia ( CRAA) and credit reporting agencies such as Veda Advantage and Dun & Bradstreet, along with consumer advocates. It has been argued strongly for Australia to adopt “positive” credit reporting which in short means that positive consumer behavior such as credit facilities being serviced and retired in a satisfactory manner would be recorded on a credit report. This would be a very positive change as currently only credit enquiries along with negative items such as payment defaults are recorded which tends to give a potential credit provider a very limited and one sided view of someone’s credit worthiness.
While there are many recommendations under consideration I would like to reflect on two significant reforms that I personally feel are well overdue and would go a long way to improve our current credit reporting platform.
Part IX Debt Agreements:
A debt agreement is a formal repayment plan to creditors that is administered by a third party. Given the right circumstances a debt agreement can be a good solution for people in financial difficulty as they can help protect secured assists such as a home while alleviating the need to deal directly with credit providers trying to recover money from them.
The administer of the debt agreement would contact the credit providers on behalf of the debtor and negotiate an agreed payment plan with them. As long as the plan is honoured the creditor cannot contact the debtor in a direct capacity and may not commence enforcement proceedings. Many see this as a more desirable option to a bankruptcy.
While a generalization, a person entering into a debt agreement may be seen as attempting to do the right thing by their creditors and while they may be experiencing challenging times, it is their intention to honour their debts as best they can. This can be quite different to someone who attempts to evade their responsibilities and uses bankruptcy as a vehicle to achieve this.
I’m not suggesting that all people who enter into a debt agreement are honorable and all people who enter a bankruptcy aren’t, however I feel there should be a clear distinction between these listings. Given the question of character is highly relevant to credit providers when assessing risk, such a distinction is not only relevant but arguably critical as although both are a part of the Bankruptcy Act there is significant difference with the two options.
Unfortunately Australia’s current credit reporting system does not allow for this distinction as both a debt agreement and a bankruptcy are recorded for a seven year period and both are deemed and equally serious by credit providers.
There is currently a significant mismatch between the term of a typical debt agreement (being five years) and the time the listing is recorded on a credit file (being seven years) which is the same recording period as a bankruptcy. Even after the debt agreement has ended and the creditors have been paid the listing will continue to severely inhibit the person’s ability to secure credit for a further two years. This provides little motivation to choose to honor commitments as opposed to walking away from them.
Many people enter into a debt agreement not only because they want to honour their debts but also because they believe the impact on their credit rating will not be as damaging; unfortunately this is not currently the case.
One of the suggested changes is to reduce the recording period of a debt agreement to five years in order to line up with a typical administration period, while a bankruptcy listing that would remain as a seven year recording.
It is important to note that this recommendation refers to the end of the debt agreement or a five year period, whichever is the latter. Should the debt agreement period be less than five years the listing will remain on a credit file for the balance of the five year term.
Another positive aspect of this recommendation is it is proposed that only debt agreements that are formally entered into will be recorded. Presently should a person make an application to enter into a debt agreement but later change their mind they may still have to endure the seven year listing even if the debt agreement was not taken up.
Under the recommendation a debt agreement credit listing would be removed when the proposal lapses, is withdrawn, is not accepted for processing or is cancelled after being accepted for processing.
For a person in or about to enter into a debt agreement these changes could be life changing and a genuine incentive to enter a debt agreement over a bankruptcy as following a five year administration period the debt agreement listing would be removed from the credit file which would assist with the individuals financial recovery.
One if the fundamental problems with credit reporting in Australia is the lack of information recorded. Currently credit providers have limited data to rely on to make their credit decisions. Nowhere is this more evident than with credit enquiry listings.
Even though credit applications or enquiries are not in themselves considered to be a negative credit listing, when a number of credit enquiries are made over a short period of time they can have disastrous effects on a credit score and in turn inhibit a persons ability to secure finance.
Currently when a credit enquiry is made very limited information is recorded such as the name of the credit provider, the date the application was made and the amount applied for, that’s it. Unfortunately it doesn’t take many credit enquiries to cause a problem, even two or three enquiries can be sufficient for people to begin to experience issues.
Many people who are declined by one credit provider will continue to make further applications thinking this is improving their chances of success when in fact it’s making matters worse. A credit enquiry is recorded for a five year period regardless of whether or not the application leads to credit being approved and taken.
From a consumers point of view this can be very confusing as for almost any other product or service obtaining a number of quotes or comparing pricing would be advisable. It’s not hard to imagine someone on their computer making a number of credit cards enquiries thinking that they are simply exploring their options when in reality they may be doing significant damage to their credit score and their prospects of securing a credit card at all.
It can be very difficult for people to accept that they are being refused credit because of their credit file even though they have no negative listings such as defaults.
Under a new scheme, which was introduced as an amendment to the Privacy Act by the Attorney-General, credit reporting agencies can add further information including the date a credit account was opened and the type of each current credit account (e.g. a mortgage, credit card, personal loan etc.), the date a credit account was closed and the current limit of each open credit account along with the repayment performance history. There has been recommendations made that only credit enquiries that lead to credit being provided should be recorded on a credit file. While from a consumers point of view the benefit of this proposed change is evident, credit providers may feel they prefer to know the shopping habits of a perspective client.
The aim of this reform is to facilitate more accurate assessment of credit risk by creating greater transparency. It is hoped that with this additional information at hand credit providers will be able to make a more informed credit decision which has the capacity to help people that are facing credit issues due to multiple credit enquiries.
A bold provision under this reform, consumers will have the capacity to be compensated if they are adversely affected by a contravention of the credit reporting provisions and courts will be given power to order compensation in cases where a civil penalty provision has been contravened.
There are many suggested changes to Australian credit reporting and not all will be adopted. We must accept that reform takes time and although there is no quick fix to the imperfections of our current system it’s encouraging that many of these recommendations are being seriously considered for implementation.
Australia is well on its way to a vastly improved credit reporting platform which will be of great benefit to credit providers and consumers alike.