Default looms for millions of Australians with credit ratings being poor

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Caesar says consumers will be able to use their credit scores to seek out better deals from lenders.

More than 2 million people, or 13 per cent of the estimated 16 million Australians using credit, are at risk of credit default.

That includes about 600,000 people who are at “high to extreme risk” of defaulting, an analysis of credit records by credit agency Veda shows.

The analysis comes from extrapolation of almost 1 million “VedaScores”, which is a number up to 1200 that summarises an individual’s credit record

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Under the new regime, credit reports will note any missed payments of more than 14 days.

The national average VedaScore is 760 and a score of 200 means the person has a 50 per cent chance of having an “adverse credit event” within the next 12 months.

Credit agencies are starting to collect more information since the start of the new credit reporting regime in March this year.

Before the change, credit reports, which credit agencies provide to lenders when they check on applicants, held only negative information, such as missed payments of more than 60 days and bankruptcies.

Under the new, comprehensive reporting regime, monthly payment histories on loans and credit cards will be shown and reports will note any missed payments of more than 14 days.

In the United States, which has had comprehensive reporting for years, as have most developed countries, lenders often use the credit score, alongside other factors such as income, employment history and financial commitments, to assess loan applicants.

Americans with poor credit records can pay higher rates of interest when taking out a new mortgage than those with good records.

The credit agencies that lobbied for comprehensive reporting in Australia, which included Veda, say the inclusion of repayment history on credit reports, for example, will help people with poor credit histories show lenders that they have changed their ways.

That was much harder under the old regime. In June this year, lender SocietyOne became the first to publicly declare it was using “risk-based pricing” for loan applicants.

The lender differs from most others in that it does not lend the money itself, but sources money from private and institutional investors.

As a new lender, SocietyOne has only one consumer credit product available: an unsecured personal loan for amounts of between $5000 and $30,000 for a term of up to three years.

Borrowers who are assessed as A-rated – those with the best credit scores – are offered the lowest interest rate while those with lower classifications pay higher interest rates.

Veda chief executive Nerida Caesar says the development of more sophisticated technology, which allows easier credit checking together with comprehensive credit reporting, makes it inevitable that more lenders will move to risk-based pricing.

It could be the second-tier lenders in Australia and the local operations of overseas banks that are the first to offer risk-based pricing, she says.

Caesar says consumers will be able to use their credit scores to seek out better deals from lenders.

Veda’s analysis shows the state carrying the highest proportion of residents at risk of default in the next 12 months is Queensland at 16 per cent, while ACT has the smallest proportion at risk at 10 per cent.

In NSW and Victoria, the risk of default is 13 per cent.

The analysis also shows that those aged in their 30s and 40s have the highest risk of default over the next 12 months.

People in their mid and late 30s and 40s have young families and are often under financial pressure, which is the most likely explanation for their higher risk of default than other age cohorts.

The Veda research shows women have better average scores than men. The research also shows that almost 80 per cent of people have never checked their credit report.

Consumers can obtain a copy of their credit reports once a year for free from credit agencies.

Henry Sapiecha
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