Getting personal

It is common practice for lenders to peer into the personal credit histories of small business customers as part of a credit assessment. The new rules mean that history can be far larger and more detailed.

The managing director of the decision analytics company Experian Australia and New Zealand, Kim Jenkins, says advisers should be working with their small business clients to tidy up their personal financial affairs ahead of the change.

“A small business owner’s personal financial conduct is a factor in a credit decision,” says Jenkins, adding that “if there is a problem in their personal history, it could be an indicator of problems in the business.”

The move from a so-called negative consumer credit reporting regime to a comprehensive – or positive – system will allow credit bureaus to include a lot more information on credit files (see breakout on page 23). The aim of the reforms is to facilitate better assessment of consumer credit risk by creating greater transparency.

Jenkins says the big issue is the inclusion of repayment histories. Late payments will be noted through a score given to each credit account.

“Advisers should be telling their clients that it is more important now to pay accounts on time,” she says. “The reporting is not retrospective, so there is time to get things in order before the new rules take effect.”

A principal of the financial services advisory firm FIMA, Steve Johnson, agrees. He says payment history is a very strong risk measurement characteristic, because it provides evidence of a borrower’s willingness to meet loan commitments.

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Negative reporting

Under the current credit reporting rules, a credit reporting agency can include the following information in a credit file:

• payment on a credit contract is at least 60 days overdue;

• a cheque for $100 or more has been dishonoured twice;

• a bankruptcy order has been made against the individual;

• a credit provider considers that the individual has committed “a serious credit infringement”; and

• details of recent credit inquiries.

Comprehensive reporting

The new scheme will allow credit reporting agencies to add the following information:

• the date a credit account was opened;

• the type of credit account opened;

• the date a credit account was closed;

• the current limit of each open credit account; and

• repayment performance history.

Ongoing issues

The finance industry is lobbying for further reform on credit reporting. Lenders would like to see the addition of data elements that are included in consumer credit files in other jurisdictions. These include the amount of unused credit on a revolving credit contract and information about whether consumers pay the minimum monthly payments or more than the minimum on their accounts.

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Another change that will have a significant impact is that lenders will see how many credit contracts a person already has. Jenkins says people have a tendency to take up offers of credit cards without thinking too much about it. However, from a credit provider’s point of view, an applicant who already has a number of revolving credit facilities might present a high serviceability risk. She recommends that advisers talk to their small business clients about consolidating their personal credit portfolios.

Experian has been in Australia since 1998, providing business data and analytics services. In 2013, it launched a credit bureau, taking on the incumbents, Veda and Dun & Bradstreet.

Jenkins says Experian operates credit bureau businesses in a number of countries, most of which have some form of comprehensive reporting rules. She expects this will help Experian adapt quickly to the new regime.

The entry of a new credit reporting bureau and changes to the reporting system have sparked some competitive activity in the market. In October 2013, Veda launched a service that gives consumers access to their credit scores, analysis of how those scores have been determined and an anti-fraud monitor. Credit reporting agencies are obliged to give consumers copies of their credit files, but Veda figures that consumers will want more information and analysis when the new regime starts.

As to the impact of the changes on the credit market, the general expectation is that it will create more opportunities for lending, because it will give lenders more information on which to base their credit decisions.

However, not everyone agrees with this scenario. Speaking at a conference in June 2013, Dun & Bradstreet’s director of consumer risk solutions, Steve Brown, said: “Lenders will start to learn things about consumers that they did not know before, such as the number of late payments they make. There may be a tendency for them to reduce credit limits in response to that.”

Either way, credit history  seems suddenly a more important piece of your clients’ business

finance challenges.