Comprehensive Credit Reporting came into place in Australia at the beginning of this month and will impact how credit providers make decisions on whether to extend finance to customers based on information collected by credit reporting agencies.
In the past, this information was purely negative in nature, with lenders assessing potential borrowers’ creditworthiness based on defaults or other negative financial events recorded in their credit file.
In 2014 Australia’s credit reporting system was expanded to enable the inclusion of positive information, providing a more complete picture of an individual’s credit behaviour.
Comprehensive Credit Reporting (CCR) or positive credit reporting, incorporating positive financial information and is designed to encourage more responsible lending through improved risk assessment, and reduced over-indebtedness. As well as details regarding overdue repayments, bankruptcy notices and court orders, credit files can now contain information on positive behaviour such as whether minimum repayments are typically made on time.
Credit files can also contain mortgage and credit card repayment histories, providing proof of regular payment patterns. Other positive information can be information on current accounts and existing credit facilities.
Improved risk assessment means less instances of loans defaulting and more lending to those who can actually service a loan, whereby negative reporting system may not have indicated.
In the past, it was necessary to rely on information volunteered by applicants, in conjunction with any negative credit information in a credit report. Applicants who didn’t disclose all the credit facilities they held, could render a new provider unable to make a fully informed lending decision. But when lenders have a complete picture of a customer’s current level of indebtedness, together with their payment history, this gives them the ability to make a more informed assessment of risk and a more responsible lending decision.
Prior to October this year, CCR was a voluntary regime, and not all credit providers choose to share positive information.
However, in the interests of compelling the finance industry to provide more responsible lending, Australia is has moved to a mandatory CCR, which is similar to that already existing in other advanced economies around the world.
Small businesses can benefit in two ways, both as a provider of credit and as a user of credit.
As a provider of goods and services on credit, small businesses can use CCR to identify, assess and manage risk, basing their credit decisions on more holistic data about a customer’s financial situation and credit-related behaviour.
Through running credit checks on customers or other businesses they deal with, small businesses can discover levels of over-commitment, credit stress or existing defaults, and thereby avoid bad debt.
Small businesses can also benefit from CCR when looking to borrow money.
Finance has been pinpointed as the single most important factor enabling small businesses to grow. But previously, under the purely negative system, it was more difficult to obtain business loans from banks.
Small business owners can now use positive credit ratings as leverage when seeking credit.
Good payment histories and information about previous credit applications that were approved can balance out negative information on a file. With CCR, it is now easier and faster to recover from negative financial events, and build a positive credit rating. This is particularly relevant for Australia’s many sole traders, whose business’s financial health is inevitably connected to their own financial health.
Comprehensive data sharing also reduces the information imbalance that can exist between lenders and borrowers, with the increased transparency leading to a better lending environment and to greater competition between lenders, with the tangible benefit to small businesses of being able to shop around for the best credit product.
Credit reports are available through online credit reporting agencies (CRAs) such as https://www.equifax.com.au/.
To evaluate your own credit worthiness, you can access your own credit file from a CRA once every 12 months for free.
If you are seeking a credit evaluation of another individual or business, you can also obtain their credit report and credit score from a CRA.