'It's a mess': credit ratings lottery revealed

'It's a mess': credit ratings lottery revealed

The national system to determine personal credit scores is a "mess", with consumers potentially being denied loans or charged wildly different rates based on which credit agency the lender uses.

Lenders seeking information about a borrower's creditworthiness can go to one of four main credit agencies in Australia: Equifax, Experian, Dun & Bradstreet or Tasmanian Collection Service in Tasmania.

Under comprehensive credit reporting, much more credit data, good and bad, is held by credit agencies on  consumers

Under comprehensive credit reporting, much more credit data, good and bad, is held by credit agencies on consumersCredit:Peter Riches

But consumers’ credit scores vary enormously depending on which credit agency the lender uses, according to data obtained exclusively for Fairfax Media. In one example of someone who wanted to borrow $5000 to buy a used car, they had a credit score of 260 out of 1200 from one credit agency and 600 out of 1000 from another.

Australia is moving towards full implementation of comprehensive credit reporting. Previously the reports that credit agencies provide to lenders on applicants only held negative information such as missed payments of more than 60 days and bankruptcies.


Under the new system, there is much more data, including monthly payment histories on loans and credit cards, with red flags on any missed payments of more than 14 days. Comprehensive credit reporting was introduced in 2014 but it's been limited because it wasn't mandatory and the banks did not come on board.

The quality of data might improve when the banks are forced to share information about their customers, though the timetable for that is uncertain.

Gerard Brody, chief executive of the Consumer Action Law Centre, urges a reconsideration of the system.

“Credit reporting is a mess and with much more data being proposed to be shared on credit reports we are concerned that the mess will only get worse,” Brody says. “The move [to have more data on reports] is rushed and we would like to see a step back to consider if the credit reporting system is actually producing public benefits.”

Peer-to-peer lender Wisr compared 7000 credit reports from two credit bureaus and found a 40 per cent difference in the number of credit inquiries recorded by bureaus, while the number of recorded defaults differed by 11 per cent.

“These two events, inquiries and defaults, can make up as much as 60 per cent of a credit score, depending on which bureau your lender uses,” says Wisr spokesman Mark Lenyszyn. “Any inconsistency in reporting could see you paying more interest on your loan or credit card."

Similar inconsistencies exist with the other 19 examples of real credit applications made through Wisr. The business lends for personal loans only, which is why the loan amounts in the table are low.

The differences occur because credit reporting agencies are receiving data from different sources and some lenders may use only one credit agency.

Comparison site Finder recently compared the price of unsecured personal loans from 20 lenders and found the cheapest loans for borrowers with stellar credit came with an average interest rate of about 9.8 per cent. Those with a riskier credit profile paid as much as 19.6 per cent interest.

Finder spokeswoman Bessie Hassan says on a personal loan of $30,000 over five years, this could mean a difference in repayments of just under $10,000 in total, or the equivalent of $154 more per month.


The credit agencies lobbied for comprehensive reporting in Australia, arguing the inclusion of repayment histories on loans would help those with poor credit histories to show lenders they had changed their ways.

Equifax Australia produced a report last year that showed, once the big banks share their data, overall, credit scores will rise.

The report estimates 6830 in 100,000 personal loan seekers would be reclassified from a high or medium-risk to low-risk under full comprehensive reporting, because more positive data would be included.

However, groups representing consumers have concerns as to whether a period of temporary financial hardship will impact a person's long-term credit rating.

The big banks have voiced concerns about the extent to which credit agencies are able to keep the customer data private - last year credit agency Equifax had the credit data of 143 million US customers hacked. (The company owns Equifax Australia but the breach did not involve any Australian customers).

Many in the fintech industry say the big banks have dragged their heels because it would allow smaller lenders to compete more aggressively for market share.

Last year the government announced it would force the four big banks to share their data - half by this September 30 and half by September 30 next year. However, the enabling legislation has stalled in the Senate, with Labor urging a 12-month delay to allow the Attorney-General's Department to complete its review of financial hardship arrangements.

Fintech companies like Wisr use "risk-based pricing", where borrowers with better credit scores pay lower rates of interest than borrowers with lower credit scores. Australian banks traditionally offered the same price to everyone and declined riskier loans.

In the United States, which has had a comprehensive credit reporting system for some time, most banks offer risk-based pricing and Australian banks are widely expected to follow suit.

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