Life isn’t linear, why should credit reporting be?
Everyone has been through ups and downs in life. Do we, as a society, measure one’s worth only on their negative experiences? Does a company only assess the times where you have been in a bad position or unemployed before hiring you? No. Merit is not developed simply by having a limited number of negative experiences, so why should credit be?
Before 2014, Australian credit was established through negative reporting. Lenders would assess a potential client based on the recorded negative instances on their credit history. Current accounts, closed and opened accounts, payment dates, and many other variables that play an important part in credit assessment would be ignored. It doesn’t sound like a very useful or intuitive system, does it?
In 2014, we adopted comprehensive credit reporting. A method that incorporates the aforementioned variables into the credit reporting system, and allows creditors to give a more in-depth assessment of the clients it evaluates.
Let’s talk about the impacts this has on Australians as a whole. I’d like to believe that Australians are hopeful and innovative people. Some of the greatest entrepreneurs I know, and some of the wealthiest people I know came from humble beginnings, and rocky starts. Sometimes rocky starts are essential for business development, as they teach a valuable lesson. Mortgages, credit cards and personal loans play such a massive role in life, and to be denied access to the best possible option, simply because you made a few mistakes in your 20s doesn’t seem fair.
I think most rational credit assessors would echo this sentiment. Credit assessments should attempt to analyse and recognize lives, rather than a few variables. This might sound naïve, and I realize that the costs of this are high, but I believe by using statistics that closely match this, we have higher loan origination and a stronger and more active economy overall.
This highlights another important factor where P2P lending pulls ahead. P2P lending lets each investor exercise their own discretion. It isn’t defined by rigid statistics or legislation. Simply put, P2P lending benefits both the lender and the borrower, especially in the aforementioned situations. Rational investors, who understand how businesses succeed and fail, are able to make investment decisions without adhering to an archaic piece of legislation. Borrowers, who may have not been able to get a loan because of a company policy or a clause in legislation, are able to gain access to finance. Of course, they have higher interest rate repayments because of a dynamic risk premium, but they are still allowed access to finance, rather than simply being denied.
Ideas, businesses, and people are fluid. We’ve all had ebbs and flows in our lives. Some ideas work, some ideas don’t. We’ve had business experiences that have flourished and others that have failed. We leave these experiences with knowledge, and the ability to improve. I would trust someone who has made mistakes in business and learned from them, rather than someone who has never dabbled in business, and hence has a clean slate.