Will we regret the changes to what information is stored in our Credit Files?

This week significant changes in legislation came into force (12/3/14) and in time I’m afraid you may regret the fact that this happened!

I’m talking about changes to your YOUR Credit File?

In the past, Australia has used a negative system where your credit history was a blank page unless you had missed payments. Only negative’s were recorded

The changes taking place today allow the payments you DO make (late or on time) as well as the payment you don’t make, to be stored in your credit file.

Why might this be something you could regret in the future?

Let’s take a look at a country that for years has used the system we appear to be moving towards and see what things are like there.

That country is the USA.

Over the last few years I have been in regular contact with Ray Smith, the CEO of Trycera Financial Inc, a company in the USA that is trying to fix the problems associated with their Credit Reporting System; a system that (supposedly) records all the payments you DO make as well as those you pay late or miss altogether (sound familiar?).

I asked Ray to outline the main problems with the system in the USA. Below is what he had to say.

Before you read this though you need to know that everyone in the USA has a credit score based on the information recorded in their credit file. If you have a good credit score you pay a lower interest rate for your mortgage, credit card, car loan etc etc etc than if you have a lower credit score.

Ray’s comments:-

Catch 22:

For starters, since a Credit Score is created from a history of debts and how you pay them, it is challenging to Get a credit score in the first place.  It’s like going to get a job and they say, you have no experience, but if no one hires you, how will you ever get experience?  The same is true with getting a credit score.  If you don’t have one (and no bank will lend you money), then how are you ever to get one?

The loan amount has no effect on the Credit Score. A person with a $300 credit card who pays their minimum payment each month can have a significantly Higher Credit Score than someone with a $25,000 credit card that missed 1 payment 6 months ago.

Income has no effect on the Credit Score.

The person with a $300 credit card (above) can have a credit score of 780 (Excellent) as opposed to the person with the $25,000 credit card (above) who has a  credit score of 600 (POOR) for missing 1 payment.  The person with the $300 credit card is unemployed and the $25,000 credit card holder earns $150,000 per year.  Who would you lend to?  Over here in the USA, the system would direct people towards the $300 credit card holder (makes NO sense!).

The Punishment does NOT fit the Crime.

In the USA the credit bureaus punish you for SEVEN (7) years for missing a payment and TEN (10) years for filing bankruptcy.  A missed payment counts against you for 7 years.  Even if you simply went on vacation and missed a $20 payment.  The amount of the missed payment has no effect, only the fact that you Missed a Payment.

No Education on How the Scoring System Works.

The only way a person gets educated on how the Credit Score System works is by experience.  There are no “Step-by-Step” instructions.  A consumer simply applies for credit and either gets approved or denied.  They have no idea how to improve their credit score to obtain the lowest / cheapest interest rates available.  The banks don’t want people to know because they want to charge the Highest rates possible.

The Credit Reports are Flawed and Incomplete.

The Federal Trade Commission conducted an 8 year study and found that 25% of consumers have errors on their credit reports. 

In addition, 100% of the credit reports are missing standard monthly payments such as rent, utilities, insurance, etc. These payments do not get reported because they are not associated with borrowings. However, the payments for this type of expense are a valid part of a consumer’s payment history but they are not on their file.

Then, because of the incomplete information held on file, renters and consumers who pay typically with cash are targeted by unscrupulous lenders and they are charged higher interest rates in order to get finance.

The lenders who want to do the right thing are forced to make decisions on incomplete information (because payments are missing from the credit file) which once again leads to higher interest rates being charged.

Should any of that be a concern to you? It is the USA after all; it would never happen here in Australia…. would it?

One of the most alarming problems with this system can best be explained in the following example.

You rent a house from someone and regularly pay them rent. However, there is no system for your landlord to record your rent payments into your credit file.

It’s not only your rent you pay on time. You pay all your services and other bills on time as well. Once again none of these payments are recorded on your credit file.

So; when you go to purchase a house, because you have never borrowed money and therefore made no loan repayments your credit file will not have any evidence of how diligent you are at paying your bills and as a result your credit rating will be low.

Because of this you are charged a higher interest rate for your mortgage or you simply won’t get one at all.

Phone bills, electricity bills, rates payments, insurance payments, car registration etc all NEED to be recorded on our Credit Files to demonstrate we are creditworthy people if we are going down this road but that is not going to happen.

Why would your landlord bother to send in your rent payment information unless there was a penalty for not doing so??? They might be motivated to report you if you miss a payment or two but otherwise it’s just one more job they have to do and heaven knows we don’t want MORE paperwork!

The saying “If it ain’t broke, don’t fix it” rings loud and clear to me! We are opening a can of worms and once the worms are out of the can we won’t be able to get them back in!!!

I heard of an elderly lady in the USA who had paid cash for everything all her life and when someone crashed into her car with no insurance she could not get a loan to purchase a new one because she had no credit history!

I’ll leave you with this thought….

Since we have taken the first step; just suppose for a moment that we do continue down the same path as the USA with credit scores based on our credit file history.

Do you think our banks would welcome this change?

With the current system for mortgage interest rates in Australia, anyone who qualifies for a loan pays the same interest rate as the next person.

If you have a Credit Score based on your credit file history, it will be used to determine what interest rate you pay for the money you borrow and the banks will be able to charge a higher interest rate for anyone who has a poor or incomplete credit file.

You don’t have to be too smart to answer my question!

There is a web-site outlining today’s changes. It’s at http://www.creditsmart.org.au/

There you will find an animated video clip outlining today’s changes in legislation. It also has a brief explanation of the reasons for the changes and then the Pro’s and Con’s of these changes. If you look to see who paid for that web-site you will see it is a ‘who’s who’ of the lending industry in Australia!

Is that a coincidence?

Now I might be worrying about nothing here! There is no mention of people having credit scores in what I have read when researching this article so it might all be a load of scary fluff!

Today you will not notice one thing different than yesterday however the door is now open.

It will take years for all this to evolve into whatever it evolves into. I sincerely hope I am wrong and we do not end up like the USA. Being forewarned might make us smarter here in Australia. I certainly hope so!

I suggest you stay aware and watch to see what happens over the years ahead and write to your local MP if you see changes come through that look like we are continuing down that path!

David Wright