Credit reporting reforms have a negative side

“Black marks” will make it worse for people in financial strife

Banks will be required to share information about your late payments on loans and credit cards with other lenders, under a proposal from treasurer Scott Morrison. This is part of a reform known as “comprehensive credit reporting”, and it's likely to create more problems than solutions.

Before these reforms, the only information on credit reports was “negative” information, such as defaults on credit contracts, legal judgments and bankruptcy. Since 2014, lenders have been able to share more comprehensive information, including credit limits, credit types and late payments. Late payments, known formally as “repayment history information”, can be listed if you make a repayment more than 14 days after the due date.

When it was implemented in 2014, sharing this information was optional for banks and lenders. Morrison wants to make banks share it with competitors.

Lenders need to have sufficient information to make sure they only give loans that a borrower can afford to repay. That's why some information on credit reports – credit limits, for example – is important. Lenders should be able to verify any loans you have with other lenders before giving you a loan.

Information about late payments, however, will likely be used to “price for risk”. That is, borrowers who make late payments may be charged higher rates of interest. That's what has happened in other countries such as the US and UK, where credit cards charging up to 50% are targeted at those with bad credit ratings.

More information on credit reports is also likely to result in more mistakes. This not only creates hassle for people to have to fix incorrect listings but will be a boon for the noxious credit repair sector. These businesses are unregulated and create false promises by claiming that credit report listings can be removed. They cannot be removed if they are accurate, and people can be charged thousands of dollars for little service.

Those doing it tough are likely to be the most negatively impacted. People who are experiencing financial difficulty should contact their bank for assistance, not be given black marks for paying late.

Gerard Brody, CEO, Consumer Action Law Centre