Credit changes could generate risk-adjusted lending
New credit reforms which came into effect today could give rise to "risk-adjusted lending", according to an industry spokesperson.
The new comprehensive credit reforms will allow financial institutions to see a more detailed record of an individual's past relationship with lenders based on a positive credit reporting system, according to comparison website finder.com.au.
According to the website, changes to the Privacy Act 1988 have allowed the Government to introduce a comprehensive credit reporting system that now allows lenders to access positive information on a credit file. Previous to this change lenders considering an individual for a loan could only see the negative listings on their credit file with no positive information to weigh it up against.
The new regime will allow credit providers access to more information about prospective borrowers' financial situation, including dates of when accounts were opened, number of accounts open, their credit limits and repayment history.
While the changes may make it easier for some to access credit, finder.com.au's Michelle Hutchison warned the reforms were a move towards ‘risk-adjusted lending', which could negatively impact loan applicants with a bad credit history.
"Currently, interest rates are generally based on a ‘single pricing' model — particularly home loans — which averages an interest rate for a particular loan size based on the lender's experience with good and bad borrowers. With access to more information, lenders can use a risk-adjusted model to base interest rates on an individual's credit behaviour.
"While this might be a fairer way of setting interest rates, it could push more borrowers who are deemed to have a bad credit history into higher rate loans," she said.
Hutchison cautions the new credit reforms could also negatively impact borrowers via aggressive marketing by lenders, credit bureaux reselling the information they collect, greater risk of privacy breaches, and accuracy of the information collected.
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