Clock is ticking: Under new reforms, consumers will have much less time to pay their overdue bills before they are recorded against their credit report. Photo: Justin McManus
Consumer groups say new credit reporting rules that come into effect tomorrow could lead to borrowers being charged more interest on loans if they fail to pay their bills on time.
From tomorrow, banks, credit agencies, utilities and telecommunication companies will have greater access to information about consumers and their borrowing habits, as part of landmark changes to privacy laws.
Under the reforms, consumers who fail to make repayments on their credit cards, home loans, personal loans, car loans or other retail offers within five days of when they are due will have it recorded as late payment against their credit report for two years.
Previously, a black mark was only recorded against borrowers who failed to make several payments that amounted to a default.
Gerard Brody, chief executive of the Consumer Action Law Centre, says while lenders say the new rules will help them identify people they shouldn't lend to, there is a risk that they will use the information to charge 'riskier' borrowers higher interest.
''It's likely that over time we'll see greater risk-based pricing – higher rates charged to those that have not paid back their credit cards or mortgages on time,'' he said.
''[Lenders] don't want to lend to people who default, but they do want to lend to people who don't pay their credit cards back on time.''
''They are the people who are paying interest and are therefore profitable to the bank.''
Lenders and credit agencies, such as Dun & Bradstreet, one of Australia's biggest, have lobbied for the changes on the basis that more information helps banks to identify whether a borrower is at risk of default or hardship.
Credit agencies stand to benefit from the new rules by being able to better serve their customers – the banks.
Steve Brown, director of consumer credit at Dun & Bradstreet said consumer concerns around lending standards were misguided as banks were still restricted in who they could lend to.
''This is about lenders being able to get a much more precise view of whether borrowers can take on credit,'' he said.
''At the end of the day, lenders will be governed by the lending legislation,'' he said.
Previously, only information such as defaults, court judgments and bankruptcies were accessible to companies. Under the new rules, information such as credit account types, status, limits and two years of repayment history will be available. Consumer group Choice said consumers still had 60 days to pay phone, electricity and gas bills greater than $150 before a default was recorded.
"While the new rules have the potential to benefit consumers, it's important to remember too many black marks on your credit record could mean your bank will knock back your application for a credit card or home loan,'' Choice spokesman Tom Godfrey said.
Credit reporting in Australia is regulated under privacy legislation because it relates to the way personal information is shared between lenders, companies and credit reporting agencies.
Under separate lending laws, banks and other lenders are required to assess whether a borrower can afford to take out a loan, and whether it would put them at risk of hardship.
It said on its website the type of credit information it collects from credit reporting companies ''may include information like your employment history, previous credit checks, any problems you've had paying bills and whether those issues were resolved''.