Unfair changes in new credit regime

by External18 Sep 2013
Not all changes to credit reporting laws may be good, says Clean Credit’s John Dickinson.
 
Clean Credit was recently featured on Channel 7’s Today Tonight; the topic was some of the proposed changes to credit reporting laws.
 
Since this story went to air we have received many calls from people who are very concerned about how these changes will affect them. A large number feel these changes are unfair. I tend to agree.
 
Firstly let me explain what is causing all the concern.
 
POSITIVES COULD BE NEGATIVES
At the moment a negative credit listing such as a payment default can only be recorded after an account is 60 days or more in arrears. There are many accounts that are rectified within this period and given this is the case, a credit provider should not list a negative item on a credit file.
 
One of the proposed changes to the credit reporting laws is to allow the recording of late payments on a credit file in as little as one week.
 
It is important to keep in mind that the recording of a late payment will not have the same impact as a payment default, however the real question is how will credit providers react to this new type of listing? The truth is we don’t know and given most lenders tend to change their credit risk profiles fairly regularly, the chances of a consistent point of view is slim.
 
Another point of concern is Dun & Bradstreet has recently reported that up to 62% of businesses are late in paying their bills, with most taking up to 52 days to pay. Keep in mind that currently an account needs to be 60 days in arrears before a negative listing can be made, so one can see the potential for many late payment listings recorded on credit files in the future.
 
I wonder how a credit provider will react when they are assessing a person’s credit worthiness when they have no defaults or court actions but have a number of late payment recordings on their credit file? Personally I fear this will be just another reason for them to decline an application.
 
Given how easy it can be to be a week or two late with paying an account, this has the potential to affect a lot of people and possibly make securing credit even harder than it already is.
 
What will be interesting is how this information will affect a person’s credit score – in short a credit score is a number recorded on a credit report that is designed to represent a person’s credit risk profile. This score is affected by a number of things such as changing employment, moving address and of course negative events such as payment defaults or court actions.
 
DRAGGING DOWN THE SCORE
Even though credit reporting agencies are stating that a late payment recording is not going to carry the same impact as an event such as a default or court action, it will almost certainly have the potential to lower a credit score and a low credit score generally means big trouble for people when trying to raise finance. My fear is that this will be yet another way for people to end up with a bad credit file.
 
Credit providers need to make sure they are applying logic to assessing risk and understand that there is a world of difference
between someone who had been a little late paying an account and someone who has recorded payment defaults on their credit file. Unfortunately as most credit providers’ credit scoring systems are fully automated, this type of logic can sometimes be found wanting.
 
How this proposed policy will affect people is yet to be seen and credit providers will need to think very hard about how they are going to use this information, as while there is little doubt credit providers use credit reports as a sorting method, they cannot say no to everybody.