Credit Ratings in UK & US

By: Tristan Dunston

Most lenders across the world approve credit applications using some form of credit scoring. The lifestyle and financial habits of consumers are statistically crunched down and converted into three figure numbers that have to reach or exceed a lender's 'cut-off' score for a consumer to be accepted for credit.

Australian lenders, like financial institutions in the UK and US, often refer to credit checking firms to add to the information they have collected through credit application forms and previous customer records. But the amount of information that can be accessed from the credit checking firms varies hugely depending on the country you are in.

Lenders calculating credit scores in the UK and US have access to a huge amount of financial information on individual consumers, while the Australian credit checking system has been described as one of the most 'restrictive' in the developed world. This is due to the tight constraints placed on Australian credit checking firms and lenders by Australia's privacy laws.

Currently there are three main companies providing Australian lenders with credit rating intelligence on consumers. Veda Advantage, the largest, has records on around 13 million Australians. The other two main players are Dun and Bradstreet and the Tasmanian Collection Service.

Australian consumer credit reports, provided to lenders, largely include information that helps lenders to identify consumers, as well as information that is recorded when something has gone wrong with a consumer's debt repayments. This is often known as 'negative' data.

The type of information typically found in an Australian credit report includes: a full current name and address, any known aliases, a consumer's gender, their date of birth, up to two previous addresses, the name of a current or last known employer and a drivers' license number.

Other information that can be disclosed in an Australian credit report can include credit searches by lenders, as well as the amount sought and cheques for more than $100 that have bounced twice. From public sources credit checking firms get records of court judgment and bankruptcy orders. Lenders report suspected serious credit infringements and overdue payments by guarantors. But for many consumers the only information that a credit reference agency will hold is details of their identity, and nothing to help lenders spot potential bad payers.

On the other hand UK and US credit reporting systems allow credit checking firms to show lenders how good consumers are at making their monthly payments and this information is updated regularly. This is known as 'positive' data and is considered gold dust to lenders who can use it to more accurately judge how likely a potential customer is to repay them, and identify potential problems much earlier.

Access to credit payment performance information allows UK and US lenders to decide what level of interest to charge consumers based on the strength of their credit ratings, and has led to an increased supply of credit for consumers.

Research has shown the use of 'positive' data, such as payment histories, is much more effective than relying on application forms for spotting consumers likely to default on their payments.

Privacy laws in Australia are currently being reviewed and Australian lenders are lobbying hard to get these privacy rules relaxed. While the current privacy system remains in place, Australian consumer credit ratings will be based on much less information than those in the UK and US and as a result Australian consumers will pay more for their credit.

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