55.44 The Privacy Act contains strict limitations on the categories of personal information that may be collected and used as part of the credit reporting process. These have been criticised by those advocating the introduction of more comprehensive credit reporting in Australia.
55.45 The underlying basis for criticism of the current credit reporting regime is that it does not do enough to allow credit providers to redress the information asymmetry between credit providers and potential borrowers. As explained in Chapter 52, ‘information asymmetry’ refers to the situation where, because a credit provider often cannot know the full credit history of an individual applying for credit, the individual has more information about his or her credit risk than the credit provider. The greater the asymmetry, the harder it is for the credit provider to assess the risk premium associated with lending to the individual in question.
55.46 The argument for reform of the current system of credit reporting is, in essence, that the current information asymmetry between credit providers and potential borrowers makes it unnecessarily difficult to assess the risk premium of individuals applying for credit. This, in turn, is said to cause a number of problems in assessing whether to provide credit:
It is difficult for a credit provider accurately to assess the risk involved in lending to an individual. This paucity of information can cause the credit provider to ‘select some bad borrowers’ (who default in their repayments) and to ‘ignore some good ones’ (who would have made their repayments had credit been extended to them).
While ‘good borrowers have no way of signalling their reliability’ to credit providers, ‘bad borrowers have no incentive’ to disclose their lack of credit worthiness.
When an individual has committed ‘a minor default in the previous five years [this] can prevent access to affordable and serviceable credit’, even when the individual’s circumstances have changed. For instance, a person who defaulted on a payment for his or her mobile phone when he or she was under the age of 18 may be refused credit at a later stage—after he or she has entered the workforce and consequently represents a much lower credit risk.
55.47 Due to problems in assessing the risk presented by individual borrowers, credit providers may charge borrowers an average interest rate that takes account of their experience of the pool of borrowers (good and bad) to whom they lend. This may cause adverse selection so that ‘some good borrowers … drop out of the credit market’, further increasing the average interest rate ‘to cover the cost of loans that are not repaid’.
 See, eg, ACIL Tasman, Comprehensive Credit Reporting: Main Report of an Analysis of its Economic Benefits for Australia [Prepared for MasterCard International] (2004), 13–14.
 The ‘risk premium’ reflects the costs associated with lending to a potential borrower. See, eg, Ibid, 2.
 Ibid, 2, 13–14.
 Ibid, 14. See also Dun & Bradstreet, Submission to Senate Economics Reference Committee Inquiry into Possible Links between Household Debt, Demand for Imported Goods and Australia’s Current Account Deficit, March 2005, 7.
 Dun & Bradstreet, Submission to Senate Economics Reference Committee Inquiry into Possible Links between Household Debt, Demand for Imported Goods and Australia’s Current Account Deficit, March 2005, 7. See also Legal Aid Queensland, Submission PR 489, 19 December 2007; Banking and Financial Services Ombudsman, Submission PR 471, 14 December 2007.
 ACIL Tasman, Comprehensive Credit Reporting: Executive Summary of an Analysis of its Economic Benefits for Australia [prepared for MasterCard International] (2004); ACIL Tasman, Comprehensive Credit Reporting: Main Report of an Analysis of its Economic Benefits for Australia [Prepared for MasterCard International] (2004), 17.