Australia’s consumer credit rules are about to change.
And it’s a change which could have the side effect of increasing Australia’s debt levels.
That’s if changes are made to the Privacy Act. Changes that have been proposed by the Australian Law Reform Commission (ALRC).
These experts say the current credit reporting system doesn’t provide the full picture of an individuals’ credit profile.
If you take the proposed changes on face value, the argument is it will improve lending practices. That it will strengthen the banks’ lending books.
Yet, there’s an equally credible argument on the opposite side. That it’s not the credit reporting system that’s at fault, it’s that banks should never have been so free with credit in the first place.
So, what do these changes mean to you?
When the changes to the Privacy Act are accepted, lenders will no longer just complete a credit check using the Credit Referencing Association of Australia (CRAA) report. Instead they can contact other lenders to determine what sort of ‘repayer’ you are.
Amazingly, it means banks could also get a credit history from your utilities provider. That’s right, your gas, electricity and phone companies!
But before I go on, firstly, it’ll help if you understand a few things about the current credit process.
Generally, when you apply for a loan you inform the banks of any loans you have outstanding. But very few lenders will bother to contact the lender to assess your payment history. If it’s not on your CRAA report, it isn’t worth knowing.
When a CRAA check is done lenders only see defaults. That’s an outstanding debt which has been sent to debt collectors or where you’re 60 to 90 days in arrears with your current loan. Plus they can see any other loans you’ve applied for.
Banks also generally have their own internal credit rating system. And they are also more likely to lend you money if they know you.
The major change is the banks will be able to find out everything about you when you apply for a loan.
You may think this sounds like a good thing.
It does until you consider the potential consequences.
For years the banks have encouraged lending for their own benefit, not yours.
The changes to the Privacy Act are more likely to have a negative impact on credit risk than a positive impact.
What I mean is that it will further concentrate lending with the four major banks. That’s because this change won’t lead to a tightening in the credit rules. And it won’t lead to less borrowing and less risk taking.
It’s more likely to lead to the opposite.
Because the banks will now know everything about your credit worthiness and your credit history they will hold all the cards. The consequences of this will be higher borrowing costs and the consolidation of risk among just four lenders.
The most obvious is debt consolidation. They will play this card even harder. It will become an all or nothing game for the banks – “If you want the home loan, you’d better give us your car loan too.”
Although they’ll probably say it nicer than that.
But they’ll still throw all sorts of incentives your way to make sure they’ve got all your business. No monthly banking fees, lower credit card rates, money boxes for the kids.
And it’s no wonder they’ll be so keen. The dollars in interest they’ll earn will be huge.
For example, just say you’ve got a car loan for $30,000. Over five years, you’ll pay back over $10,000 in interest, based on an interest rate of 11.49%. But they’ll get you to add your $30,000 car loan to your 25 year mortgage because the interest rate and repayments are less.
Only you’ll pay back over $27,000 in interest. Because although the variable interest rate is just 5.99%, you’re paying the loan back over 25 years instead of five.
Plus, we know home loan interest rates won’t stay that low for long.
If you’re like most Australians, you probably trade your car in every 6 – 8 years.
So, it’s possible you’d still be paying off the original car loan even though you’ve sold the car! And even worse, now you’ve got another loan for the new car which they’ll also probably tell you to add to your mortgage as well.
All that extra interest from you is going straight to the CEO’s Christmas bonus!
The argument will be that this is good because it will improve lending standards and make sure individuals don’t over commit themselves to debt they can’t afford.
Do you really think that’s how it will work? The banks love lending money. That’s how they make such big profits. And they know that a big percentage of Australians – rightly or wrongly – heavily rely on debt.
The real side effect from these new rules is that the same people who are already addicted to debt will continue to be addicted to debt. Only now, thanks to the lack of competition and a flawed system, these same people will just end up paying even more in interest charges.
Because the banks won’t refuse them credit, they’ll just charge a higher interest rate to cover for the perception of higher risk.
So with the four major banks taking a bigger percentage of the loans, it will just make them even bigger.
Is there a chance they could become too big to fail? You could probably argue they’ve already reached that size.
So far, more by luck and bail-outs than skill, our Aussie banks haven’t failed yet. And hopefully they won’t.
But the proposed changes to the Privacy Act and the impact on the consumer lending market don’t fill me with a lot of confidence at the moment.
Giving more power and control to the four major banks doesn’t spell good news for the consumer, the tax payer or you.
Shae Smith
Assistant Editor, Money Morning Australia
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Banks are hogs for money. They do nothing for clients that they can’t be caught for. everything they do is for themselves and their profits. They dress it up but the facts are plain, they pirate as much gain as they can. From dodgy fees to overcharged interest, to outright lies.
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