The mechanics of credit remain a mystery to most Australians, it seems. And yet the process banks use to decide who gets money, and what rate of interest they pay, has a huge effect on everyone’s financial futures and is one of the most easily influenced of all such factors.

Credit rating institutions gather financial data here, the same way they do everywhere else. But in Australia, unlike other developed economies such as the U.S. and U.K., lending institutions only report certain basic data, such as the fact that a loan application was submitted (but not whether it was accepted or rejected), defaults of greater than 90 days, and bankruptcy. In short, they only report data that’s negative.

Laws requiring positive credit reporting, for lending institutions to report the good news regarding someone’s repayment history, don’t take effect until 2011. This means that a household that’s faithfully paid a mortgage for ten years and has never been late with utilities or credit card payments, has no better rating than someone who’s applied for credit but never used it.

The change in reporting requirements will be a boon for those who currently get no credit for their good credit.

“The major benefit for you is that banks will then be falling over themselves to lend you money,” said Joel Palmer, a financial planner with Palmer Portfolios.

For those whose repayment histories are a bit more dicey, the new regime will allow for any good news there is to balance out at least some of the bad.

Right now, “[i]f you apply for 27 credit cards in two months, or miss a few too many payments, you’ll end up with a black mark against your name and find it next to impossible to obtain new finance,” said Mr. Palmer.

It’s important to note that the size of the repayment and the source of the debt have no bearing on credit reporting, positive or negative. Missing the cell phone bill or the gas makes as big a mark on a credit report as the mortgage, and paying it later does not remove that mark.

“Negative records such as collection accounts, late payments and bankruptcies stay on your credit report for up to seven years, even if you pay them off,” said Christine Christian of reporting agency Dun & Bradstreet.

And anyone can, of course, obtain a copy of their credit report at no charge from any of the agencies.

Source: news.com.au