Why your credit score is going to change on July 1

Lenders are set to learn a lot more about borrowers from July 1, with banks required to share more data on applicants than ever before.

The full implementation of comprehensive credit reporting next month means everyone’s credit score is likely to change.

It’s set to be a game-changer for many borrowers, but some experts say there are risks as well as rewards.

What is comprehensive credit reporting?

Prior to March 2014, only negative credit events were shared between institutions.

This meant borrowers’ positive credit histories weren’t always taken into account when they were assessed for a loan.

Negative events included late repayments, defaults, bankruptcies and court judgments, but also the number of credit cards borrowers had or had applied for.

Positive credit reporting started in 2014, although most big banks didn’t take it up. But starting last year, the big banks were required to report 50 per cent of their positive credit transactions.

These include regular payment histories, what accounts borrowers have, and what types of credit they use. Such a system is already in place in the UK and the US. 

Starting July 1, banks will have 90 days to share 100 per cent of the positive credit events with other financial institutions, giving lenders a more complete view of applicants’ financial history.

What does comprehensive credit reporting mean for borrowers?

Almost all credit scores are set to change, and this will affect the interest rate are offered.

Domain Home Loans chief executive Rob Towey said comprehensive credit reporting would allow lenders to see two years of positive repayment history.

“For some customers [the changes] will work in their favour, and some will now be viewed as less attractive customers,” he said.

He said Australians didn’t pay a lot of attention to their credit rating, despite it potentially improving their negotiating position when attempting to access cheaper finance from banks.

“If they’re applying for their home loan, an awareness of their credit rating affects how aggressively they can negotiate with lenders.”

Canstar Group Executive Financial Services’ Steve Mickenbecker said the changes would speed up the application process.

“Credit approvals will be far more automated,” he said. “If you have a very good credit score, you’ll get a low price that reflects the risk to the company. Other borrowers may get priced up.”

He said smaller lenders would be better equipped to assess how borrowers had performed with other financial institutions.

“It will open up opportunities for smaller competitors to build a stronger business and make more proactive offers,” he said.

Finder’s Bessie Hassan said common mistakes like moving and not updating a mailing address could affect credit scores while use of buy-now-pay-later platforms would also have an impact.

What are the downsides of comprehensive credit reporting?

Consumer Action Law Centre chief executive Gerard Brody said he had concerns about the way comprehensive credit reporting was being implemented.

“Some people are able to demonstrate they are good credit risks and might benefit from good interest rate offers,” he said.

“Those who can’t are going to be significantly disadvantaged and charged higher amounts for credit. They’re a lot more likely to be people in the community doing it tough.”

IBISWorld senior industry analyst Tommy Wu said the changes were good news, but there was a trade-off in providing more information.

“There’s always risks with having so much information but that’s the cost benefit of getting everyone access to cheaper credit and making loans and borrowing more accessible,” he said. 

Equifax, one of the main credit reporting agencies in Australia, was hacked in 2017 with personal information of hundreds of about 148 million Americans stolen from its servers

Brody said he hoped Equifax had “learnt its lessons” given the company would hold even more personal information of millions of Australians. 

“We should be concerned that they’ve got the highest security standards,” he said. 

Borrowers can find out their credit rating from an approved credit reporting body.