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As one of Australia’s three credit bureaus, Experian oversees credit data covering 94 per cent of the credit-active Australian population. Among those millions of credit files and billions of data points, an intriguing trend has developed.
Despite what might seem like another red flag for the economy, there has been a steady rise in financial hardship indicators (FHIs) among the credit files within our bureau.
On the surface, that doesn’t sound great. It’s obviously not a good thing that Australians experience financial hardship and I sympathise with the many Australian households struggling right now.
However, dig a little deeper and you can see there is a positive aspect to this trend and it lies in the overall health of our credit reporting system.
What’s so hard about hardship?
Firstly, it’s important to understand that an increase in hardship is not necessarily a sign of failure but a sign more Australians are proactively communicating changes to their financial situation with their bank.
Financial hardship information, which reflects agreements between borrowers and lenders to adjust repayment plans due to financial strain, has been a recent addition to credit files. Introduced in mid-2022 this indicator is crucial to support responsible lending practices and ensure borrowers get the help they need.
It is important borrowers recognise that for a lender, a financial hardship indicator on your credit report does not spell out the reasons for the hardship nor does it tarnish a borrower’s credit report. Instead, it simply shows that there’s an arrangement in place – a lifeline rather than a liability.
At Experian, we’ve noticed that around 0.3 per cent of mortgage holders have such markers, with the number rising for personal loans (0.8 per cent) and automotive loans (0.5 per cent), with less than 0.1 per cent of credit card holders having FHI on their account. These numbers might seem small, but they tell a big story about trust and communication between financial institutions and their customers.
ASIC’s recent review of hardship applications from 30 large lenders revealed there had been more than 430,000 applications from more than 170,000 customers since 2022. Almost 40 per cent of these applications related to home loans, of which 80 per cent were owner-occupiers.
Why is this increase in FHIs good news?
Firstly, it shows our system is doing exactly what it’s supposed to do – helping people when they hit a rough patch. More importantly, it highlights a shift in how people manage financial difficulties. Nowadays, more Australians are stepping forward to work out solutions with their lenders rather than avoiding the conversation until it’s too late. This proactive approach helps prevent more severe financial fallout, like defaults.
These changes in the Credit Reporting Code and hardship regulations have strengthened this safety net. These adjustments ensure that any financial hardship arrangement is accurately recorded, protecting consumers from negative impacts on their credit scores. It’s a system designed not just to monitor but to support.
By capturing these early indicators of financial stress, lenders can tailor their offerings to better suit the needs of their customers, enhancing overall financial stability.
Lenders recognise they could be faster to offer help
However, it’s not all smooth sailing. Despite the enhancements to the credit reporting system, ASIC’s recent report identified an inadequate focus on customers was making it difficult to ensure the right outcomes.
Additionally, our 2023 Risk Radar Report, which surveyed 75 risk leaders, revealed a significant portion of risk experts at banks and credit providers admit there’s room for improvement in proactively identifying customers facing financial difficulties.
Our Risk Radar Report found that despite the volatile environment, just 16 per cent of risk leaders said their organisation was highly effective at proactively identifying customers in financial stress, with 45 per cent sharing that they’re moderately effective.
Just over half of risk leaders (55 per cent) said the earliest their organisation could reliably identify that a customer is in a position of financial stress was not until they missed a repayment, which was slightly higher than risk leaders that reported the same in 2022 (53 per cent). Surprisingly, almost a quarter (23 per cent) of lenders don’t know if a customer is in financial stress until they are contacted. This gap suggests a vital area where lenders can better harness data to intervene earlier, providing support before customers miss payments.
This dialogue around hardship is crucial for breaking down misconceptions. Despite the progress, many borrowers still believe that seeking help could harm their financial reputation. Clear communication and education are key to changing this narrative, ensuring people understand that these measures are designed to protect, not penalise them.
As we move forward, the role of credit bureaus in creating a transparent, responsive, and compassionate financial environment is more important than ever. We’re not just here to keep score but to provide a safety net that reflects the realities of modern financial life.
Charlotte Rankin is the director of client advisory, credit services at Experian, one of the world’s leading global information services companies that operates one of three credit bureaus in Australia.
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