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
{ 11 comments… read them below or add one }
Shae I suggest that you read the “Trade Practices Act” What you are proposing regarding taking over personal loans etc. is illegal if done at the lenders request.
I think that the proposed changes do have some negatives for the average borrower, but not the ones that you have highlighted.
Any increased knowledge by the lender will have some affect on prospective borrowers. Some beneficial, some not so.
Everyone should check their Veda file periodically to ensure the accuracy of that information. You can do that at http://www.mycreditfile.com.au
The current system is not great, and identity theft does occur.
Perversely the major lenders will always revert to these bureaucracies to endorse larger borrowers credentials on the basis of existing debt service. The more debt they have vision of them servicing the more they will be able to access additional debt. The revenue/income assessments on borrowers (and their investments) and their happy clapping assessments of collateral valuations is the end from which the banks have failed to make rational judgement and have fueled the bubble.
Shae, it looks to me that you are hedging your bet too much. You need to take a punt and say whether you expect banks to become more generous, or less generous, in terms of handing out money as a result. Maybe you were trying to say that they will be handing out more money and at higher rates, but it is far from clear, and the only thing I can get out of what you say is that things are getting worse for the borrower, but then there is hardly anything new in that. So, what are you saying?
Peter,
What if you approach Veda and they come back with a report which says you own some credit card company fifty thousand and it’s via identity theft for example.
Is the company at liberty to contact the credit card company to pass on your contact address so they can then persue you? how on earth do you prove your identity has been stolen?
We’re seeing interesting changes in the UK too.
Mick – If you did a search of your own file and found that there was an incorrect entry on it, you should immediately contact Veda and ask what steps are needed to recitfy the situation. It could just be a mistake (eg two people have the same names) or it could be something more sinister.
Whatever the problem, the sooner you move on it the better. Ignoring it will make it worse. Statutory declarations from people who know you, signature comparisons, and general investigations will help convince Veda and the lenders that it was not your debt.
Mick I hope that hasn’t happened to you. Keep you drivers licence, passport etc secure.
Mick – on the other part of your question, if you give Veda an updated address they are obliged to note your file. I suggest that you phone them and ask some general questions. If you do have a problem with a $50,000 unsecured debt you may need some qualified assistance to make arrangements on your behalf. A solicitor may be a good place to start.
Best of luck Mick.
Peter,
The main reason I ask is I lost my wallet a couple of years ago in a taxi. As you can imagine licence, medicare card, Business corporate card etc.
I guess my other area of concern is do the credit agencies get wind that you are sniffing around finding out what is recorded about you as apparently even if you make a casual enquiry about some forms of credit it’s noted that you did not achieve it which in itself could be marked as a negative.
Mick – Everyone is entitled to check their own credit file at any time without anything being noted. In your position I would check your file to ensure that nothing untoward has happened.
If you advise Veda that you are at a new address, they will update their files, which means that any unsatisfied creditors will find out about the new address in time. If you have been the victim of identity theft it would be a good idea to seek professional legal advice. Ignoring it won’t help. If you haven’t been chased by debt collectors my guess is that all is ok. Veda is not the only source of information for debt collectors.
If you have unsatisfied debts of your own making and can’t pay them, then arrangements can be made. Do some research on part 9 and bankruptcy to see if that would be of benefit. Again you would benefit from professional help with those options.
Mick, a public forum is probably not the best place to discuss personal financial matters. If you wanted to send me an email I will give you whatever information I am able, but again you may need a solicitor to solve the problem if your identity has been stolen.
Interesting article, I suppose I thought that the changes were designed to make sure lending was more targetted. By having clearer information, banks can adjust their offering to suit the client’s risk profile. While I agree with Shae that this could lead to some people ve given a bum deal, I think it could also lead to some people getting a better deal. If there is competition (and lets be honest, there is ’some’ competition – i.e. NAB, Westpac and CBA love it when you decide to borrow $500K off them!) then people that have a good credit rating may be offered better rates than present, simply by virtue of the bank being more confident in its credit assessment.
I say this because I will probably appear more credit worthy. My VEDA file probably has black marks all over it from late phone bills when I was 18 and videos I didnt return for years etc…). But my income, ssavings, payment of CC etc… show I have some financial management skills and if they think my income will grow, I probably appear to be a good client.
So without looking at the changes, I dont agree with the suggestion that clearer personal credit information will be to the detriment of the borrower overall
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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