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Hard truth on credit reports

Failure to pay bills is landing tougher consequences

Financially stretched consumers would stop paying their mortgage before skipping their gas, insurance and phone bills.

NewsPoll asked 1200 consumers which bills they would not pay if they did not have enough money to meet their financial obligations. The mortgage is the most-nominated expense for non-payment, followed by pay TV subscriptions. More consumers would forgo payments on the mortgage, pay TV and electricity before they stopped paying their mobile phone bills.

The survey, sponsored by credit reporting agency Dun & Bradstreet, goes against the accepted wisdom that most people would think it essential to keep paying the mortgage on time. Steve Brown, head of the consumer credit bureau at Dun & Bradstreet, says the results are probably explained by the fact consumers think about the consequences of not making their financial obligations.

''They are looking at how their lifestyle would be affected,'' he says. ''With the mortgage, the reality is nothing is likely to happen for months,'' Brown says. That is because there are processes that have to be followed by a lender before the house can be repossessed and the lender is going to negotiate first with the borrower.

Brown says another factor could be that delaying a mortgage payment ''frees up'' more cash than not paying some of the other household bills. Many people probably feel they cannot do without the mobile phone, he says. The pay-TV subscription, he says, is probably regarded as a bit of a luxury. Brown warns, however, that under credit reporting rules that come into force next year, much more information will be held on credit reports. Australia has a system in which only payments of more than 60 days late are recorded. They are recorded as ''defaults''.

However, under the new reporting regime, a payment more than five days late will be recorded as ''not made'' on credit reports. While the new reporting regime does not start until March, payment history going back to December 2012 can be included in the reports. As is the case now, payment history will not be included for utilities and telcos. Only defaults of more than 60 days with utilities and telecommunications companies will be recorded.

Brown says about 85 per cent of people have no reportable problems under the present system. Another 5 per cent have multiple incidents of payment defaults.

The remaining 10 per cent have had a ''bump in the road'', Brown says. They will have missed payments due to a life event, such as losing their job or because of an ill partner, but will have since returned their finances to good order.

Defaults and bankruptcies will continue to be erased from credit records five years from the date they are recorded. Missed payments will be erased after two years.

At present, credit reports include credit applications only, not whether the credit was approved or declined by the credit provider. Under the new regime, credit reports will include not only applications for credit but also show when a credit account for the mortgage, credit card or personal loan is opened and closed. Credit providers will see credit limits of the accounts and payment history. But credit card balances will not be recorded.

Brown says the extra information will help the 10 per cent who have had occasional problems to restore their credit worthiness more quickly. However, there are some individuals who are ''teetering'' on defaulting but are receiving more credit because lenders are not seeing the fuller picture.

''Some of the 85 per cent who do not have any reportable problems under the current reporting system are, in fact, overcommitted,'' Brown says. They may find it harder to get credit under the new regime, he says.

Read more: http://www.theage.com.au/money/hard-truth-on-credit-reports-20130907-2tc7b.html#ixzz2eRHe7Hey

Posted by John Collett - The Age Money on 8th September, 2013 | Comments | Trackbacks

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