From The Real Estate Conversation.
From the end of this year, ‘positive data’ will be available to lenders to help them assess loan applications.
The federal government has fast tracked changes that will allow greater data sharing between banks, meaning borrowers will be able to be assessed on how well they have repaid loans in the last two year.
“The government’s move to fast-track positive data sharing will mean more Australian borrowers will see the benefits of a fairer system much sooner,” Susan Steele, credit bureau Experian’s Australia / New Zealand managing director.
The change, which was recommended by the Productivity Commission, is particularly relevant to those seeking approval for home loans.
How do the new rules work?
Currently, when borrowers are applying for credit in Australia, lenders ask for permission to access the borrower’s credit report to help them asses if they will be able to repay the loan. Only defaults are visible in these credit reports.
The new rules will mean that lenders will be able to see ‘positive data’ as well, for example, lenders will be able to see how well borrowers have repaid credit card, personal loans, or mortgages over the last two years.
The data will also show how many credit accounts someone has, and how much credit they have in total.
What impact with the changes have?
The changes are likely to see credit scores change, sometimes dramatically.
“Your next application may be assessed differently with lenders for the first time being able to see how well a borrower has paid back credit over the previous 24 months,” said Steele.
“This will include historical data coming online from credit cards, mortgages and personal loans.”
Steele said most Australians are very good at repaying credit. Experian’s data showed that around 80% of Australians have a clean record of not missing a repayment.
“Aussie borrowers are likely to see their credit scores increase or decrease in the coming weeks and months,” said Steele, as “new data about how many credit accounts they have open and how much the combined credit limits they have is factored into their scores for the first time.”
The new data is likely to have far-reaching impacts across a range of credit decisions, said Steele, including loan approvals and declines, changes in interest rates, and changes in lending limits.
“Industry research suggests around 40% of decisions about credit applications will change, in comparison to when only negative data was shared,” she said.
“Overall approval rates from banks are tipped to increase by 10-15%,” she said, “with research showing the share of bad loans could fall by as much as 45% when positive data is included in credit decisions.”
“Positive data sharing will also assist others to avoid entering into unmanageable levels of debt and getting into financial difficulty.”
Steele said borrowers can improve their credit score by “diligently making repayments on time”.
What to do if you are applying for a loan
Steele advised that borrowers, and those hoping to have loans approved, should check their credit scores regularly, and make sure new positive data is being factored in.
“The best thing home hunters can do is check their credit report before applying for a mortgage, something which, worryingly, our research shows seven in ten Australians admit to never having done. Consumers can check their score at any time, free of charge,” she said.
Positive data sharing is already in operation in 18 different countries.
“From our experience,” said Steele, “in the 18 other countries where we operate a credit bureau, positive data sharing is a much fairer system”.
First-home buyers
Steele said, “It may help potential first-home buyers who don’t have a long credit history, to be approved for finance, where previously they may have been declined due to a lack of insight into the way they handle their finances.”
