Shortening the credit memory will cost us all dearly
Amendment No. 6 to the Credit Data Law shortens the registration period for negative credit data from three years to one. This change is expected to increase information asymmetry and raise risk premiums for all borrowers.
In Amendment No. 6 to the Credit Data Law, passed last month, a credit database was established including information on small and medium-sized businesses. Alongside this step, during the discussions of the Economic Committee, which prepared the law for its second reading, an amendment with far-reaching implications was added, set to take effect in about six months: the registration period for negative credit data — such as late payments, returned checks, or enforcement proceedings — used for providing a "credit score," was shortened from three years to just one year.
A credit score is used primarily for granting relatively small consumer loans, such as increasing a credit limit, unlike a credit report, which is used primarily for large loans like mortgages. The purpose of the amendment, according to the Knesset members, is to allow the public to recover more quickly from negative events and return to receiving credit in a shorter time. Additionally, it was determined that in emergency events, such as war, the Commissioner for Credit Data will be able to immediately exclude negative data of customers to prevent harm to their credit conditions.
The Economic Committee, where the amendment was introduced, noted that it relied on the positions of social activists and mortgage consultants. The committee chairman, David Bitan, called these activists "representatives of civil society." However, it is unclear to what extent the broad economic consequences of the change were systematically examined. With the amendment taking effect, credit score data in Israel will be deleted in a significantly shorter period than is customary in developed countries. In the United States, the period is seven years, in the UK and Canada six years, and in many European countries between three and five years.
The meaning of reducing the quality of information in the credit score is an increase in information asymmetry between the loan applicant and the lender, and therefore also an increase in the risk premium of all loans of this type. The practical meaning of the decision is that all borrowers will pay higher interest to finance the advantage that will be enjoyed by those who were late in payment or did not honor checks in 2025–2026. The popularity of the proposal stems from the same psychological mechanism that was at the base of this year's government bill to grant mortgage takers a monthly budget grant, which will retroactively finance the price increase in variable interest mortgage repayments caused by the rise in interest rates.
In addition to raising the risk premium on all loans as a result of the decrease in the quality of information available to lenders, the amendment also causes another result: strengthening the relative status of banks compared to other credit providers. The banks, which control the household credit market without restraint, already hold high-quality information on the history of borrowers, and therefore do not need the government database to a large extent. Reducing the information provided within the credit score therefore mainly harms those who take loans from non-bank entities.
Professor Ron Shapira is the Rector of the Peres Academic Center.
