Clean Credit was recently featured on channel 7’s Today Tonight; the topic was some of the proposed changes to credit reporting laws.
Since this story went to air we have received many calls from people that are very concerned about how these changes will affect them. Many feel some of these changes are very unfair, I tend to agree. Firstly let me explain what is causing all the concern.
At the moment a negative credit listing such as a payment default can only be recorded after an account is sixty days or more in arrears. This means that anything less than this cannot be recorded and although an account may be behind it will not affect a person’s credit file until after the sixty day period. It’s important to note that given credit providers follow all the necessary steps such as issuing demand letters etc they may list a default after 60 days. There are laws that prevent a credit provider listing a default too long after the event however we will leave this topic for another time.
One of the proposed changes to the credit reporting laws is to allow the recording of late payments on a credit file in as little as one week. It is important to keep in mind that the recording of a late payment is not the same as a default and the credit reporting agencies are quick to point out this difference however the real question is how will credit providers react to these listings? After all the credit markets are tough at the moment and credit providers are being very careful about whom they provide credit to.
Another point of concern is Dun & Bradstreet has recently reported that business’ take on average 54 days to pay their bills. This being the case one can see the potential for many late payment listings recorded on credit files.
I wonder how a credit provider will react when they are assessing a person’s credit worthiness when they have no defaults or court actions but have a number of late payment recordings on their credit file? Personally I fear this will be just another reason for them to decline an application.
Given how easy it can be to be a week late with paying an account this has the potential to affect a lot of people and possibly make securing credit even harder than it already is.
What will be interesting is how will this information affect a persons credit score, in short a credit score is a number recorded on a credit report that is designed to represent a persons credit risk profile. This score is affected by a number of things such as changing employment, moving address and of course negative events such as payment defaults or court actions.
Even though credit reporting agencies are stating that a late payment recording is not going to carry the same magnitude as an event such as a default or court action, it will almost certainly have the potential to lower a credit score and a low credit score generally means big trouble for people when trying to raise finance.
My fear is that this will be yet another way for people to end up with a bad credit file.
I feel this situation could end up being quite similar to issues with credit enquiries where one or two listings may not prove to be a problem however once someone has a few listings over a relatively short time period they may really start to struggle, finding themselves being refused credit even though they have no actual defaults or court listings recorded.
Credit providers need to add some logic to assessing risk and understand that there is a world of difference between someone that had been late on a few accounts (as little as a week) and someone that has recorded payment defaults on their credit file. Unfortunately as most credit providers credit scoring systems are fully automated this type of logic can sometimes be found wanting.
How this new policy affects people is yet to be seen and credit providers will need to think very hard about how they are going to use this information to assess risk as while there no little doubt credit providers use credit reports as a culling or sorting method, they cannot say no to everybody.
Here is a link to the Today Tonight story covering this topic. Click here