Whenever you apply for credit – and this can include opening a new mobile phone or gas/electricity account, the service provider is likely to take a look at your credit history.
At present, this shows any applications you’ve made for credit as well as negative information like unpaid bills, overdue accounts and loan defaults. These details can stay on your credit history for years, potentially making it difficult to secure a competitively priced loan. Yet people often don’t know they have a tarnished credit record until they’re knocked back for a loan.
This system is set to change from 1 July when “comprehensive” credit reporting (CCR) is due to kick in. The proposed legislation calls for our big financial institutions to provide details of positive as well as negative events, and up to 24 months of debt repayment history can be recorded on your personal credit file.
A healthy credit rating matters
It may all sound a bit “big brother”, however the new credit reporting changes will give lenders a more rounded picture of your credit history. Paying bills and loan repayments on time will reflect favourably on your credit report and hopefully make it easier to secure credit. On the flipside, consistently dragging the chain with bills can make it harder to get a loan.
Positive credit reporting has been in place overseas for some time, and anecdotally, borrowers often use a strong credit rating to negotiate a lower interest rate.
While 1 July is several months away, the big banks have already begun compiling details of your repayment history in readiness for the new system to come into effect on 1 July. That makes it more important than ever to pay bills on time.
A bill payment strategy can help
In our busy lives it can be easy to overlook bill payment dates. Setting up an automatic direct debit can help, or, if you have a credit card debt, it can be worth asking your bank whether an automatic payment system is available. These autopay systems usually let you choose between paying the closing balance of your card, the minimum payment or a set sum each month.
If you regularly struggle to meet bills for utilities like power and gas, ask your energy provider about “bill smoothing”. This is where you work out your total power bill for the last year, divide it by 12 and then pay a monthly sum into your energy account. A lot of people say it is far more manageable than paying a large quarterly bill.
A worthwhile step is talking to your financial adviser to understand what your credit history looks like – especially if you have plans to apply for a loan any time soon. A review of your budget can also go a long way to ensuring your personal cash flow can handle regular bills.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.