What can we learn from the UK's experience of comprehensive credit reporting?
In March 2014, Australia introduced comprehensive credit reporting, a regime that was established in the UK, USA and other countries over 10 years ago.
The change sent shivers up my spine, because having worked with credit-impaired consumers and companies in the UK I knew there were significantly higher numbers of adverse listings there and that that trend would undoubtedly emerge in the Australian financial system.
Particularly onerous were repayment history indicators which are yet to appear on Australian credit reports (though the legislation is in place).
Prior to comprehensive credit reporting being introduced in Australia, there were 16.38 million credit files in existence in Australia, according to Veda Advantage. These credit files listed 3.8 million consumer defaults and 477,324 court actions. On commercial (that is, company) credit files there were 158,025 defaults and 105,000 judgments. Based on these figures it was estimated that 10-20 per cent of the credit-active Australian population was effected by a poor credit rating.
In the UK, after 10-plus years of comprehensive credit reporting, the situation is much direr. Research conducted in 2012 revealed 57 per cent of the UK adult population were at risk of being declined credit by mainstream lenders. This research highlighted the enormous difficulty that credit-impaired consumers and companies experience when trying to gain low-interest finance.
Based on these figures, it seems to me that having now introduced comprehensive credit reporting into Australia the numbers of credit-impaired consumers and companies will rise from 10-20 per cent to over 50 per cent. But this is not the only difference that I have noted between the UK and Australian financial systems. In our experience of assisting people in the UK, a person's employment can be put at risk because of a poor credit rating. Access to rental properties is contingent on a good credit score and even video rental cards are refused when credit files are not up to scratch.
The effect of comprehensive credit reporting has also created a much more fragmented financial market in the UK. There are numerous less-regulated finance options that have emerged to deal with the comprehensive credit reporting regime – bridging finance, hedge funds and private funds run by wealthy families. These options come with very high interest rates, up to 10 times higher than interest rates offered by the mainstream banks, and all profiting from people who have poor credit scores, which are surprisingly easy to come by in the UK.
In 2014, a research report by Dr John Glen found that UK families with a poor credit score were paying £3.5 billion ($6.4 billion) more than people with good credit for identical products and services. The average family with a low credit rating therefore spent an extra £1,170 ($2,130) each year on mobile phone contracts, utility bills, broadband, credit cards, white goods and cars purchased on finance.
This report did not include mortgages, which must be taken into account to get a complete picture of what credit impaired consumers face. The average UK mortgage is £180,000 ($330,000) but if adverse listings are present on a credit report a consumer will pay upwards of two per cent in interest rates, costing more than £3,500 ($6,500) per year. This will be the interest rate hike for 'light adverse', but if a consumer has 'heavy adverse' this will attract interest rates of up to 50% or more. Once a consumer gets into this adverse market their credit report also reflects this and mainstream lenders can use this information to reject loan applications in the future, leading to a cycle of high interest rates that is very difficult to break out of.
So comprehensive credit reporting in the UK has dramatically increased the number of people who have impaired credit files. This has had an impact on other areas of people's lives such as interest rates on mortgages, employment, ability to access rental properties and the establishment of accounts for small purchases. In addition, there are more opportunities for the entrance into financial markets of less-regulated organisations that are prepared to offer finance at extremely high interest rates. And because of this, there is a desperation factor that we note in the UK amongst the credit impaired that I would hate to see spread to the Australian market.
Dr Merrilyn Mansfield, lead adjudicator and researcher, Princeville Credit Advocates
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