How will you be affected by the new positive credit reporting?
As of March lenders can now share with credit reporting agencies a lot more information about you and the way you look after your current loans. So what does this mean to you as an investor? What should you look out for and be mindful of? In a Q and A style I answer your concerns.
What’s the difference between negative and positive credit reporting?
Negative reporting – a record of payment defaults and credit enquiries only [current system]
Partial reporting – defaults and enquiries + Date opened, credit limit, type of credit, date closed
Positive reporting – defaults and enquiries + Date opened, credit limit, type of credit, date closed + 24 months repayment history
What can be recorded about me at a credit bureau?
Comprehensive credit reporting allows for more detailed information on a borrower to be stored, this will allow the incoming lender / enquirer to build a more comprehensive character profile on their prospective borrower. Let’s take a look at each of the new five fields they’ve introduced and what a lender can draw from those.
Account open date: All of the customers open accounts and age of accounts. It’s widely believed that a loan account that is open for less than 24months is known as a limited account, as in it doesn’t offer much of a reference so the data is mostly disregarded. A loan account open for five years though allows for a profile to be built, the lenders will be looking for the accounts open the longest, especially those over five years as it is believed that a borrowers past five years is a good indication on their next five.
Account limit: This shows debt exposure and can tell a story. For example, the accounts are open for a short period of time and for a low limit like $2,000. This may suggest a borrower who does not manage their pay packet very well and needs short term credit to stay afloat.
Type of credit: Is the type of credit predominantly store cards, or credit for real property? Again a lender can add this to their profile building. Obviously credit for property is seen in better light than consumer credit.
Date Account closed: This links in with the account open date.
Repayment history: This is the new jewel in the credit reporting agency’s crown. Lenders will be able to look back month by month for the past two years at the repayment history of a specific loan, they will be especially interested in credit cards that have been open for over two years. Lenders often say to us, if a borrower cannot manage the repayments on a $5,000 credit card why should we trust them with a $400,000 mortgage?
To bust a myth here, many borrowers believe that if you’re a couple of days late in making a monthly credit card payment no sweat. Sorry to disappoint, but if you’re 5 days past the monthly due date you’re actually 35 days late, so repayment history is the data that could bring undone those that are a little tardy in making their credit card repayments.
Will they go retrospective from March 2014?
Right now as I write, no lender is contributing more than what they did last year, so they’re all still running on the old way of doing things. Now that said, as soon as the first lender starts contributing more information to your credit file the other lenders will come on board pretty quick. What we’re hearing is yes they will go retrospective as soon as the first lender commits. What we don’t know yet is, will they include credit that has been open for more than five years? The old system had all the enquiries dropping off at five years, except bankruptcies, which stay for ten.
How can I outsmart them?
Thought I’d throw this in because someone might be thinking this… Really though as the world gets smaller, information is getting easier to collate and more of it is being shared between common agencies, so you shouldn’t be thinking ‘how can I outsmart them’ but more of ‘do I have all of my affairs in order’? See ‘What should I do?’ below.
Will all credit providers be involved?
At this stage from what we can learn, for a credit provider to be able to see the last 24 months repayment history they must be a licensed credit provider as defined by the National Consumer Credit Protection act 2009. In English that means utility and telecommunication providers will not be able to see your repayment history on your mortgage at this stage. That however may change in time.
Also under the new regime, credit providers can choose their level of participation. What this means is if they only want to contribute a certain amount of information on a borrower to Veda Advantage then they can only see that in return, so this means not all of your information will be made available to every lender that enquires about you.
When will it start?
The start date was March 2014, from what we hear no lender has made the first move of supplying your data yet, so everyone is still doing it the old way. That said as soon as the first lender moves, expect others to follow quickly.
What should I do?
You can’t stop progress, so the best thing to do is make sure you have all of your credit accounts on direct debit, especially credit cards, they will be the ones that will potentially undo you.
As a property investor should I be concerned?
I’m going to say no. My reason for this is over the last 23 years I’ve noticed some common threads with property investors and two of those are, the majority of investors clear their credit cards monthly and the vast majority have very low consumer debt (Often referred to as bad debt). So as an observation I’m going to say you have little to concern yourself about.
If you would like further clarification on this issue, or any other property finance issues please feel free to contact one of my brokers on 1300 657 132.