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Heather Roy's Diary

Posted on 24 Jul 2009

Media Storm In A Credit Teacup
A simple product launch this week quickly turned into something of a media storm as news agencies reported a 'revolutionary new' credit rating system. In reality the product is a numerical scoring of the company's credit data, which can be purchased to assist with risk assessment - and assessment is already standard practice of lending institutions like banks.

Any measure that provides accurate, timely and useful information to the financial market is to be welcomed. This product has emerged from a debate around the pros and cons of negative credit reporting versus positive credit reporting.

The country's largest credit reporting company Veda Advantage - formerly BayCorp - announcement that, as of early August, it will begin offering for sale credit rating data that scores people by rating them between -330 and +1,000 to determine their creditworthiness when they apply for finance.

The rating will be based on information that Veda already holds on the applicant - individuals with scores of 100 or less will find it difficult to obtain credit, 500-600 is the average, and those with 700 or higher would be viewed as low-risk.

While this is a new product for Veda, credit reporting is not actually new. With negative reporting - which we have now - an agency will assess a lenders risk based on past loan defaults or bankruptcies. Under positive reporting someone on a low income - who, on the surface, might appear a credit risk - can build up a positive record should they have a history of paying their bills promptly.

Lenders have long used credit reporting systems. One form of positive credit rating is pre-approved credit limits - have you ever wondered why your credit card limit keeps going up, or why a banker might approve your personal loan on the spot?

Companies like Veda represent only a small part of the total financial market - debt collection and the supply of historical information about past financial transactions for which it has visibility. Many people assume these companies are lenders but they are not, they offer databases for sale as part of their business.

Historical information is just one relevant factor and isn't necessarily considered by lenders to be the top predictor of reliable repayment. It should be noted that there are many examples of security breaches committed by individuals with previously unblemished security records.

To be relied upon by lenders and borrowers, any system must have general acceptance from all major elements of the market. To this end, major trading banks and financial lending institutions have spent many years working to develop credit rating systems that strike an effective balance between these challenging points on the financial market continuum.

The rating systems used by the major lenders are derived from substantial analysis of their own lending data. In particular, they assess lenders by: age, income, profession and debt delinquency in that priority order.

Using this criteria, a low-income pensioner for example - who, stereotypically might appear a bad credit risk - might be viewed as a good credit risk under a behaviour model because they have a calmer, more predictable lifestyle and are often debt-free with assets such as a freehold house.

Under most bank scoring models the weighting carried by age, income and profession scores trumps debt delinquency. Unfortunately, debt collection and credit reporting companies like Veda do not often have all the information necessary to build up this kind of 'total risk picture'.

A very important concern surrounding this issue is privacy. Credit reporting firms currently want privacy law to be changed so they can collect more information on New Zealanders. While the Privacy Commissioner's office is considering the proposal as part of a review of credit reporting in New Zealand, opponents claim the move could make it impossible for some people to obtain credit from reputable lenders - forcing them to turn to fringe lenders.

Advocates, however, believe that supplying more information would provide lenders with a more accurate view - allowing them to calculate risk, adjust interest rates, and offer applicants more reasonable and appropriate credit.

Whatever the outcome, this is a timely reminder for consumers to check their credit history and become familiar with the information that credit reporting agencies hold about them.

Consumers should be aware of their creditworthiness and can obtain a free annual credit report with which to do so. Should the report be incorrect, they can ask that details be corrected - if this is denied, they must be told the reason and can ask that a 'statement of the correction sought but not made' be attached to their record and be included in future reports.

While the security of debt is an important issue to consider, this is also a good time - given the current financial climate - for people to concentrate on savings as well.

Lest We Forget - Nixon Ordered To Hand Over Watergate Tapes (July 24 1974)
Thirty-five years ago the US Supreme Court ordered President Richard Nixon to surrender recordings of White House conversations about the Watergate affair - in which burglars were caught rifling through confidential papers and bugging the office of Nixon's political opponents at the Watergate Hotel headquarters of the Democratic National Committee during the 1972 election campaign.

While the White House had already released edited transcripts, Nixon had refused to comply with a court order requiring him to produce the tapes - which, according to prosecutor Leon Jaworski, implicated the President in a cover-up of the break-in.

On July 24 1974, however, Chief Justice Warren E Burger rejected Nixon's claims of executive privilege and ordered him to "yield to the demonstrated, specific need for evidence in a pending criminal trial."

Although expressing disappointment with the ruling, Nixon said he would comply with the ruling and went on to become the first US president in history to resign from office in August 1974.


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