As of 12 March this year (that's tomorrow), the Australian laws for credit reporting is changing. Most people (60 per cent according to the Australian Retail Credit Association) don't know about this change, and it is perhaps the most significant legislation change to your personal finances in your lifetime. So it's worth sitting up and taking notice.
Credit card picture from Shutterstock
What is a "credit report"?
A credit report is a file which scores your personal finance history. The report is what a bank or any service provider uses to assess whether you're a "good citizen". It allows them to understand whether or not you have the capacity to pay for their services and what fees they should be charging to cover their risk. So it is the basis for how a bank picks and chooses its customers -- whether they approve or deny your loan or credit card application.
Despite its importance, credit reporting is poorly understood by Australians. In fact, Veda the dominant credit report provider in Australia, found that up to 80 per cent of consumers aren't even aware such a report existed of them.
What are the changes?
Australian credit reporting practices is changing to be in line with the rest of the OECD. Traditionally, we have used "negative" reporting -- meaning the primary focus has been on whether or not you have been denied credit enquires in your history. Every time you've been requested and denied for credit products like a home loan or a credit card, that's recorded. While this is simple, the downside has been that particularly given rising house prices, multiple loan enquires and for increasingly larger amounts has been more common. So it's been easier to rack up more bad marks against your name than ever before.
From 12 March, this will change to "positive reporting" -- meaning the assessment will be made with the focus on whether or not you've serviced your credit on time. Or in other words, whether you've paid your bills on time. In its totality, this is a fairer system because more data is considered so it will be a truer representation of how "good" you are.
However, there is a downside. The implication of the new laws is that every time you're late paying a bill, a black mark will essentially be registered against your name. While this sounds fair, the consumer behaviour truths make this worrying.
Starting off, only a small proportion of consumers are aware of credit ratings and the changes March 2014 entails -- so no one actually knows that paying bills on time is going to be more important. Secondly, looking at January 2014 data in Pocketbook, 12 per cent of all bills were paid late -- so a significant proportion of people currently pay bills late by habit already. And finally, Veda last month reported that loan applications are at the highest level it has been in four years -- so more people are relying on their credit reports to get the finance they want.
These trends in combination means you should care. It also doesn't help when the banks seem to be charging you illegal late fees on top of all of this.
What can you do?
To minimise the risk of being straddled with bad credit, the best course of action is to make sure you pay your bills on time from March. A few novel ways you can make this easier for yourself:
- Ask your provider to send all your bills via email and set up special tagging or folders in your email client.
- Use the calendar function on your phone to set up reminders for due dates.
- Download your bank's mobile app, so you can pay bills whenever you're out and about.
Finally, at Pocketbook, we've built the app with bill support from day one. We detect your bills automatically, forecast it and alert you when we don't see it paid. Over the next few weeks, in response to the legislation change, we'll provide a feature for you to alter the due date we've forecasted, to make sure this is even more accurate in the fight to maintain your good credit.
Why You Shouldn’t Pay Bills Late From March 2014 [Pocketbook]