Changes to the Privacy Act have opened a brand new window for banks to see into your personal credit history. Are you afraid of what they might find?
Late last year the Australian government introduced changes to the Privacy Act. These changes, which come into full effect in March 2014, give banks greater access to your complete credit history. It’s a regime change of sorts. Australia is moving from a negative reporting system – where only negative credit events are recorded, to a ‘positive reporting system’ where the fullness of your credit history is on display.
The changes aren’t especially radical – most of the developed world is already there. However, the changes do have major and important implications for borrowers and investors in Australia.
The revamped credit histories will give banks and lenders a much fuller picture of your credit history when assessing your credit worthiness. Previously banks were only able to see the amount and dates that credit was applied for, as well as any negative listings, such as defaults, judgements and bankruptcy. Under the new regime, banks now also have access to:
- The date a credit account was opened / closed
- The type of credit account opened
- The credit limit of each open credit account; and
- The repayment performance history of the individual
It is this last change – the inclusion of your repayment performance history – that will have the biggest impact on borrowers in Australia.
What the changes mean for you
Whether the changes will be good or bad for you depends on your credit history. In some cases it may actually help borrowers get ahead. Say, for example, you had a spell of bad luck that meant that once, you had to default on a particular loan, but for many years you’ve had a healthy relationship with your mortgage and a number of credit cards. With this information, banks may be more willing to treat a negative listing as an isolated incident in an otherwise clean history.
However, it will cut both ways, and borrowers who previously had a healthy credit rating could suddenly find themselves out of favour. A habit of missed or late payments, or an over-reliance on credit cards, could start ringing alarm bells, and could make it harder for you to secure the loan you want.
International experience has shown that these changes have quickly raised consumer credit consciousness. Consumers have found that they have had to get much more disciplined with the management of their credit lines, and that they’ve had to work harder to keep on top of their repayments. We can expect it to play out the same way here.
Powering up a wealth strategy
At McCarthy Group, we are already on top of this. We know that successful wealth creation strategies are built on the intelligent use of leverage. We also know that the power of that leverage is determined by the terms of finance you’re able to secure.
With the increased level of information available to the credit provider’s under the positive reporting system it’s likely that your credit history will have even more importance in the future. It won’t just be about whether your bank manager says yes or no to your loan application. Your credit history could determine the terms of your finance. It could have a big influence on the rate of interest you pay, since solid customers with better credit ratings are better able to negotiate discounts off advertised rates. We already see banks in the current market ‘pricing for risk’ by offering more discounts for applications with a lower loan-to-value ratio.
As your portfolio expands and you become a more active investor, these financing terms become more and more important.
Get a Check-up!
That’s why it is worth checking your credit report regularly, to make sure it is an accurate reflection of your credit history. You would be surprised at how often mistakes can slip in there. And as the scope of the credit history report expands, so does the room for error.
In Australia, there are two places where you can check your credit history. They are:
Your credit rating itself is one of your most important assets, and it is worth securing and protecting.
Going up against the banks and the credit system can seem overwhelming. We can help. We know the value of a solid credit rating, and we put a lot of work into developing a healthy relationship with credit.
If you’d like to talk to one of McCarthy Group’s Credit Advisers please feel free to email contact (02) 9687 3601 and get started in Property Investment today.