Your credit history up for scrutiny
Skipping a bill or a credit card payment does not usually seem like a big deal.
Once the rent has been paid and next week's salary is in, catching up is not often a problem.
But, starting next Sunday, missed and late payments will have the potential to affect people's credit ratings.
Banks, finance companies, telcos, electricity, gas and insurance companies will be able to collect and swap information showing how much credit someone has and how they are getting on with repayments.
A few hiccups should not hurt anyone's ability to borrow money for a house, car or holiday in the future, says credit reporting bureau Veda.
But a pattern of skipping – even on small payments – could result in a negative score.
Companies stress that nothing will happen immediately – it takes months or years to build up a credit history and lenders are not yet ready to collect the information.
Once lenders have notified their customers that they are going to start, they can hold the information for up to two years.
First up are likely to be four "top end" banks and finance companies, which, Veda's John Roberts said, were looking to supply it data in the middle of this year.
Within a year other lenders would join, and possibly later on telcos and power companies.
The information will be swapped on a "whoever gives, gets" basis under a system worked out by umbrella body the Retail Credit Association.
But first companies need to get their IT systems ready, says RCA head Justin Kerr.
"I reckon in about three or four months' time if a consumer gets a copy of their credit file they will start to see information," says Roberts.
Kiwibank, Westpac and ANZ say they will take part although they can not yet say when. ASB and BNZ said they were looking into it.
At the moment, it is all too easy to forget there is a credit file held somewhere in your name.
But consumer and privacy watchdogs say that needs to change.
It is not very easy for an ordinary person to work out how they will be scored under the new system. Paying all bills on time is obviously the best approach, but how much leeway is there? New Zealand's two big credit agencies, Veda and Dun & Bradstreet, will not disclose the exact formulas they use to assign people credit scores but they did provide some guidance.
"If you have missed a payment on your credit card it will show as a one month missed payment. If you catch it up the next month it will show that you've caught it up," says Roberts.
He says the pattern of payment matters more than the amount, and one or two misses should not matter too much.
"A risk assessment is all about behaviour and if you miss four or five payments, whether it's $100 or $1000, it is still predictive of your likely risk."
John Scott, of Dun & Bradstreet, says lenders will look for patterns indicating whether a missed payment is an oversight.
"If you've gone away and forgotten a payment, broadly ... people will see that you missed a payment but did you immediately then correct it the next month?"
They might ask: "Have they missed a second payment, and have they missed other payments in that month? Are they missing across the board or are they only in certain areas?" he says.
Ultimately lenders – not bureaus – will decide what is important for the type of credit someone wants, and bureau scores will only form part of the picture alongside income, home ownership and other factors.
The rules are changing because the Privacy Commissioner's office was convinced that on balance, ordinary people would be better off.
Commissioner Marie Shroff says she will be closely watching how things unfold.
"This is another example of Big Data. Everything is pretty much collected these days even though it may not be available to the general public [and] a lot of companies are making a lot of money," she says.
Australia is making the same move, leaving few Western countries without a similar system, she says.
The commission drew the line at some of the more intrusive aspects allowed in the United States, where companies can see how much of someone's credit is utilised (for example the balance spent on a credit card) and employers and landlords have access to files.
As always, people will have to give lenders permission to look.
Federation of Family Budgeting Services head Raewyn Fox hopes the changes will stop so many people having to resort to predatory high interest lenders that specialise in "bad credit" loans.
People who suffer a financial meltdown after a divorce, death in the family or a job loss can do little at the moment to budge the black mark that sits on their file for five years.
Now everyone who pays their bills diligently will have a chance to prove they deserve mainstream credit, says Fox. "Probably between half and three quarters of all the families we see, some kind of life event has tipped them over," she says.
"If you live in a low income area and don't have a particularly high income you might not be rated immediately as a good credit risk, but if you can show ... that you've always paid your bills on time a lender might be prepared to lend to you," says Shroff.
On the flipside it will also be possible to score badly in entirely new ways.
Until now, only debts that went badly wrong have showed up on people's credit files. To register as having a default under the current system "someone has not only missed a payment, they have missed two or three payments, gone through a number of the credit provider's internal processes, still not paid them, been passed on to a credit collection agency and still not paid," says Scott.
The new system may pick up people who have been flying under the radar.
West Auckland commercial lawyer Carolyn Ranson gives the example of a friend who often struggles with her bills but has never actually defaulted.
"She has never had her phone cut off but there have been times when things have been really tight and she hasn't been able to pay bills on time. All that information now will stack up against her," says Ranson.
"If you have struggled to pay your bills in the past, potentially there could be a stream of people going the other way [away from mainstream lenders]," she says.
As for banks, better credit information should save them money, theoretically allowing them to drop some of the "safety" margins on unsecured personal loans – currently about half a percentage point – says Massey University banking expert David Tripe.
Whether that happens will depend on the competitiveness of the banking industry, says Tripe.
Banks were coy when asked whether prices would drop, with only Kiwibank saying it thought the changes would ultimately help cut credit rates.
Eventually, good payers could be offered more competitive interest rates than bad payers, although Bankers' Association regulatory director Karen Scott-Howman stressed that was only a possibility. Perhaps the most positive change in the eyes of budget advisers is the ability to spot people who are juggling too much credit.
People borrowing from Peter to pay back Paul, and failing to tell Peter, may find themselves cut off once lenders see the extent of their loans. (Although while many finance companies are in, others are likely to remain outside the information sharing deal so their loans could be hidden).
In Hong Kong, according to research cited by Dun & Bradstreet, defaults and bankruptcies spiked once lenders realised how much trouble some people were actually in. In some countries, access to credit contracted at first.
"Once you work through that particular spike there are lower rates of delinquency, higher rates of financial inclusion and more people can access mainstream credit," says Scott.
Overall the country's credit rating improves, says Roberts.
Still, borrowers may wait some time to see the benefits. The credit bureaus stress it takes months or years to build up reliable records, and their usefulness depends on a lot of lenders contributing.
Would the Privacy Commission change back the rules if no benefits for ordinary people materialised?
"We're not in a position really to collect that [economic] information very effectively but we will be working with key stakeholders to assess whether the claimed benefits have emerged," says Shroff.
"A more likely scenario would be refinement or tightening of the rules, but if major problems emerged we would look at things fundamentally again."
As a trade-off for new powers lenders must supply yearly independent audits showing how they are handling the information, and the Privacy Commissioner handles complaints. A review is planned after three years.
Until then the best thing a person can do is take advantage of their right to a free copy of their credit file. Credit bureaus are obliged to provide these within 20 days (usually they arrive sooner) and people can challenge any mistakes that they find.
"Your credit reputation is an important part of your ability to operate in modern society," says Shroff.
"Everything you do these days is pretty much recorded even though it may not be public. Like all good modern inventions there is a good side to that. But there is also potentially a slightly negative side, unless you are very careful."
CHANGES IN A NUTSHELL
From April 1 whether people pay their bills when due and whether they meet their repayments will be recorded by banks and credit providers, and uploaded monthly to a person's file held by credit bureaus.
Banks, finance companies, telcos, electricity, gas and insurance companies can see this, if the person gives them permission, but landlords, employers and others cannot.
How much credit people have with different lenders will be held on file, for example the total credit limit on all credit cards.
To help stop identity fraud people can put a stop on their file for free, if, for example, they lose a wallet or handbag and fear that someone is using their identity to apply for credit.
Everyone is entitled to get a free copy of their file from the credit bureaus Veda and Dun & Bradstreet.
- © Fairfax NZ News