Context: The cost-of-living squeeze meets a trust gap

Inflation and higher borrowing costs have tightened household cashflows. Since May 2022, the Reserve Bank of Australia lifted the cash rate by 425 bps to 4.35%, compressing mortgage affordability while essentials remain elevated. Against this backdrop, Arca’s CreditSmart research finds many borrowers avoid contacting lenders for support due to misconceptions about credit reporting consequences. Industry conversations point to two persistent myths: that a hardship arrangement automatically ruins a credit score, and that a single request is equivalent to a default.

The regulatory reality is more nuanced. Under Australia’s credit reporting framework, “financial hardship information” (FHI) can appear on a credit report, but major credit reporting bodies state it is not used to calculate credit scores. Lenders do see FHI and consider it in underwriting, but its purpose is context, not punishment. ASIC and the National Credit Code require lenders to assess hardship requests fairly and promptly. The gap between perception and regulation is the friction.

Why this matters commercially: delayed contact increases roll rates, pushes accounts to 90+ days past due, and inflates loss given default (LGD). Early, non-stigmatised assistance preserves customer value and reduces provision volatility. A senior industry source involved in CreditSmart’s outreach summarised the issue bluntly: the sooner customers understand that asking for help is not a black mark, the better the book performs.

Decision: Project Clarity — a composite, evidence-led program at a Tier‑1 lender (2024)

To quantify the upside of dispelling credit myths, a top-five Australian lender (composite case drawn from interviews, regulatory guidance and global benchmarks) initiated “Project Clarity.” The decision thesis rested on three pillars:

• Business impact: Each 5 bps reduction in annualised loss rate on a $50bn mortgage book saves ~$25m in provisions. Early hardship engagement is one of the most cost-effective levers to achieve this.
• Customer trust: Clear, consistent explanations of how hardship is recorded can lower the stigma barrier and increase inbound contact before arrears escalate.
• Competitive advantage: A streamlined digital hardship journey becomes a differentiator in a market where switching and refinancing have slowed.

The bank framed hardship redesign as a growth risk initiative rather than a compliance cost, backed by a board-level mandate and cross-functional KPIs (risk, operations, digital, brand).

Implementation: From policy opacity to transparent, analytics-driven support

Project Clarity rolled out in four workstreams over 20 weeks:

1. Policy and language reset: Legal, risk and customer teams co-authored plain-English explanations of FHI: what is recorded, for how long, and what it does not do (e.g., it is not a default and is not used to calculate credit scores). Scripts and website copy were A/B tested to reduce fear language and set clear expectations on documentation and timelines.
2. Data and targeting: Using transaction analytics and open banking signals (with consent), the bank built early-warning propensity models to flag cashflow stress (e.g., rising utilities, rent hikes, childcare costs, BNPL usage). Models prioritised outreach to customers most likely to benefit from short-term arrangements.
3. Digital journey redesign: A mobile-first hardship flow enabled customers to self-select arrangement types (temporary vs. longer-term), upload evidence securely, and receive instant eligibility guidance. UI microcopy surfaced the FHI explanation at decision points, reducing abandonment.
4. Collections operating model: Agents were retrained to offer “help-first” options within the first contact and to close the loop with a post-arrangement credit-reporting explainer. Scorecards were updated to measure cure rates, roll-forward, and net promoter score (NPS) post-hardship.

Technology note: The analytics stack leveraged the rapidly expanding local market. Australia’s data analytics sector is projected to reach roughly AUD 19.08bn by 2034 at a 25.3% CAGR from 2025; other forecasts peg 2030 values between USD 7.5bn and USD 10.2bn at ~38% CAGR. This maturity enables lenders to build explainable, privacy-compliant models that triage hardship needs without overfitting or biasing decisions.

Results: Hard numbers from pilots and the P&L bridge

Across a six‑month pilot covering 450,000 retail accounts (composite across mortgages, cards and personal loans), the bank recorded:

• +28% increase in early inbound hardship contacts (0–30 days past due) after introducing plain-language FHI explanations in emails, statements and the app.
• –17% reduction in accounts rolling from 30+ to 90+ days past due in pilot cohorts versus control, attributed to faster entry into tailored arrangements.
• –35 bps reduction in annualised loss charge on the unsecured portfolio and –12 bps on home loans, driven by improved cure rates and lower LGD.
• +11 pts improvement in post-hardship NPS and –23% drop in complaints related to credit reporting misunderstandings.
• Contact centre efficiency: average handling time fell 14% as agents used standardised FHI scripts and digital pre-fill reduced rework.

Financial translation: On a $50bn mortgage book and $8bn unsecured book, the measured bps improvements equated to an estimated $41–$55m reduction in annual provisions. Operating expense savings (contact centre and manual review) added a further $6–$9m, delivering a year-one 1.2–1.6% uplift in retail ROE.

Market signals: Consumer advocates reported fewer cases of borrowers avoiding contact due to credit fears when lenders explained FHI clearly and early. Fintech challengers leaned into the narrative, promoting hardship tools that display, in real time, what will and will not appear on a credit report — a positioning that is quickly becoming table stakes rather than a niche feature.

Technical deep dive: What lenders must clarify

To close the perception gap credibly, institutions should consistently explain:

• What FHI is: an indicator that a temporary or varied arrangement exists, generally visible to credit providers for context.
• What FHI is not: it is not a default and major credit reporting bodies state it is not used to calculate credit scores. It typically remains on file for a defined period (e.g., 12 months) and should be understood alongside repayment history information (RHI), not as a penalty code.
• How lenders use it: as a signal to understand affordability and tailor support, not as an automatic basis for adverse action.

Transparency here reduces borrower anxiety, accelerates self-disclosure, and improves risk outcomes.

Market and competitive implications

- Business impact: Early-hardship engagement decreases roll-forward and stabilises provisions through the cycle — especially valuable if unemployment ticks up. In a slow-growth credit market, protecting the back book is the new growth.

- Competitive advantage: First movers that operationalise transparent hardship flows will capture loyalty and referrals in broker channels. Expect brokers to favour lenders whose customers are less likely to spiral into arrears.

- Implementation reality: The heavy lifting is change management — aligning legal, risk and brand to one narrative. Embedding a single source of truth for FHI across scripts, web and app is non-negotiable.

- Future outlook: As analytics tooling proliferates, proactive identification of at-risk segments (with explicit consent and guardrails) will become commonplace. Regulators are likely to amplify consumer education; lenders that get ahead with clear, consistent disclosures will shape that conversation rather than be shaped by it.

Lessons: A practical playbook for decision-makers

• Make transparency the product: Treat hardship explanations as a core feature, not a footer. Test copy. Measure comprehension.
• Move from reactive to proactive: Deploy early-warning models to invite support before delinquency. Use consented data only; explain why you’re reaching out.
• Close the loop on credit reporting: Provide a post-arrangement summary that states exactly what appears on the credit report and for how long.
• Engineer for speed: Offer same-day provisional arrangements with light documentation where risk-appropriate; delay increases loss.
• Measure what matters: Track roll rates, cure rates, LGD, complaints about credit reporting, and post-hardship NPS. Tie exec bonuses to early-contact KPIs.
• Partner where it pays: Where internal capacity is thin, leverage Australia’s fast-growing analytics market — but insist on explainability and bias testing.

The bottom line: dismantling credit myths isn’t a comms exercise; it’s a balance-sheet strategy. Lenders that meet customers with clarity and speed will carry fewer bad debts — and more goodwill — into the next cycle.