7 minute read
Understanding credit reporting
What is a credit reporting agency?
By David Johnson MICM*
David Johnson MICM
Credit Reporting Agencies allow lenders to share information about the credit behaviours of consumers and businesses. Traditionally the purpose was to prevent poor borrowers from simply moving between different credit providers and building up large sums of unpaid credit (which ultimately everyone pays for through higher interest rates).
With the recent legislation changes to incorporate comprehensive repayment information, more credit reporting agencies are now showing positive repayment history in their dataset. Though the uptake in comprehensive reporting has been slow, the intention has been to help lift consumer credit scores generally.
The humble credit report
Credit reports contain information about how a consumer manages any current and past debts, as well as their repayment history. They also have the necessary information to identify the consumer. Finally, the report may contain information about any instances in which the consumer failed to meet repayment obligations and other public documents such as court documents/decisions and instances of bankruptcy.
Below is a breakdown of what appears on consumer credit reports: l Identification information including: { Name { Date of Birth { current and past addresses { place of work l credit applications (sometimes called enquiries) including: { the type of credit applied for { the amount { the provider l credit liabilities – current and past including: { the type of credit { the amount { the provider
l monthly repayments information for each liability including: { how up to date (or otherwise) the account is relative to obligations { hardship, or variations to contracted terms l any defaulted debts, including: { whether it’s still current { the amount of bad debt { the provider responsible for the debt Unfortunately, only some credit providers include repayment information in the credit report, impacting the information that they see about a consumer when reviewing an application.
Further, a credit report only lists the information that has been shared with the agency that prepared the report, which explains why often details are missing and why different credit providers will respond differently to the same application.
By enriching their data sets with comprehensive reporting, agencies help credit providers obtain better results faster. As a credit provider, practicing in and promoting comprehensive credit reporting will only boost your customer’s experience, increase your application conversion rates, and improve your business.
Limitation faced by credit providers
Credit reporting is a complex subject for consumers and regulators. Many consumers are unaware of their credit report and uneducated on the impact the report has on their financial wellness. Those tasked with regulating the industry, face constant scrutiny and must make decisions to keep in line with the ➤
needs of the industry and the consumer.
So far, credit reporting in Australia has been regarded as a repository for predominantly negative credit information. This data set is heavily biased and may result in good customers being denied credit, which is contrary to the a credit providers objective.
Not understanding this limitation has only increased the amount of application rejections, reducing the size of a credit providers addressable customer base. Understand the premise of negative reporting is to find reasons to reject an application. By viewing a negative only report for what it is and applying the metrics of a comprehensive credit report, a credit provider will typically see an increase in their application conversion rate.
The way negative only reporting makes another impact to credit providers, is how the system generates models containing negative behaviours to identify people who are likely to exhibit negative behaviours, look-a-like lists. When a look-a-like consumer then makes an application for credit, they are likely to be rejected due to no fault of their own or the credit provider.
Ultimately credit providers are given a skewed and incomplete information on a consumer, when reviewing their application. This has allowed for the propensity of the status quo; whereby negative credit reporting remains engraved in the underlying credit reporting system.
Without the benefit of comprehensive credit reporting, credit providers face increased costs of dealing with old credit enquiries, increased number of application rejections and the financial outlay to respond to queries and complaints. All of this outweighs the value negative only reporting provides.
The positive way forward
Regardless of the size and volume of your business, comprehensive credit reporting will help you increase your customer base, and help you engage with your customer in a more progressive manner. Proper implementation of comprehensive reporting changes the role of the bureau, to identify information to support an application rather than reject it.
Engaging in comprehensive credit reporting will provide more transparency to the consumer, encouraging them to meet their obligations and enhance their credit worthiness. Communicate in a transparent and open manner with your consumers both in where their information resides, and how this information is used in a beneficial manner to them.
Consumers will then feel empowered by having fair access to challenge the information reported and request quick corrections that should cost the credit provider nothing (through the right credit reporting agency). An actively engaged consumer is more inclined to meet their financial repayments.
Credit reporting is the tool to enhance the credit worthiness of a consumer, rather than a tool to detract from it. In doing so we will reduce the need for credit repair agencies, reduce the reliance of dispute resolution mechanisms, and generate positive outcomes for consumers and credit providers alike.
Well executed, comprehensive credit reporting will:
1. Improve your overall conversion rate, increasing your customer base. 2. Encourage positive payment behaviour from your customers. 3. Enhance trust in your brand, through increased transparency.
Advancing the industry
By knowing the basics, most credit providers will do just fine in the industry, the industry won’t change but it will continue. That said knowing the ‘why’ will hopefully start some difficult and well overdue conversations leading to growth.
It is now not enough to accept the system, the current weighting of negative to positive information pits the consumer against the credit providers. The lack of transparency, with negative credit reporting, creates an environment where the information is often questionable and the focus on negative inputs only creates negative outcomes for everyone. Credit providers are in the business of providing credit, not denying it. Why continue perpetuating a system that is tying one hand behind your back. Comprehensive reporting will show empirical evidence to validate the consumers creditworthiness. By actively engaging in comprehensive credit reporting, credit providers will get better insights faster allowing credit providers to approve more applications.
With the introduction of comprehensive credit reporting into your business procedures, increasing your returns is all but guaranteed. It’s not something to be feared or be hesitant of, instead it should be embraced to produce beneficial results to both credit providers and their customers. It’s time to redefine credit worthiness. Are you ready for change?
*David Johnson MICM CEO Talefin T: 1300 284 193 www.talefin.com
