Israel Cuts Negative Credit Data Retention to One Year, Raising Loan Costs for All

Israel recently amended its Credit Data Law, establishing a credit database for small and medium businesses and significantly shortening the retention period for negative credit data from three years to one year. This change, set to take effect in about six months, applies to credit signals such as payment delays, bounced checks, or enforcement proceedings, which are primarily used for small consumer loans rather than large loans like mortgages. Lawmakers justified the amendment by aiming to help individuals recover more quickly from negative credit events and regain access to credit sooner. Additionally, in emergencies like war, the credit data commissioner can immediately exclude negative data to protect customers' credit conditions.

The Economic Committee, which prepared the law for its second reading, incorporated input from social activists and mortgage advisors, with committee chair David Bitan referring to these contributors as "civil society representatives." However, the broader economic consequences of the change remain unclear beyond the views presented to the committee. Compared to developed countries where negative credit data is retained for three to seven years, Israel’s new one-year period is notably short.

Professor Ron Shapira, rector of the Peres Academic Center, explained that reducing the quality of credit information increases information asymmetry between borrowers and lenders, leading to higher risk premiums on all loans. While the amendment benefits those with recent negative credit records by allowing faster credit recovery, it raises borrowing costs for all other loan applicants. This dynamic mirrors other welfare-like policies that are popular but impose dispersed costs on the public.

Furthermore, the amendment strengthens the relative position of banks over non-bank lenders. Banks already hold detailed borrower histories and sophisticated risk management systems, so they are less affected by the reduced availability of government credit data. This shift runs counter to efforts to reduce market concentration and support alternative credit providers. Critics warn that politicians may be exploiting public sentiment for electoral gain without fully considering the broader social welfare impact.