Private credit bureaus are information-gathering companies that provide credit information to banks and other lending companies regarding private individuals and their credit scores. This type of information is used to decide the credit risks of private individuals who avail of loans, financing, and credit cards. Credit scores represent an individual’s credit worthiness or that individual’s history of bills and credit payments. Banks and financial institutions decide whether an individual is a credit risk or not depending on the credit score report. The interest rates applied to these loans, credit card, or financing also depends on the credit report of the individual.
Importance of Credit Bureaus
Private credit bureaus gather their data regarding an individual’s credit score from public record offices, creditors, debtors, debt collection agencies, and other data collection resources. In some countries, such as the United States with its Fair Credit Reporting Act, legislation offers their citizens protections from erroneous credit reports. There are circumstances wherein private individuals have difficulty in obtaining loans or have to pay a higher interest on loans and credit cards due to inaccuracies in credit information.
Some credit bureaus offer membership to individuals so that they can obtain the same credit information as the financial institutions. In most of the world's leading developed economies, virtually all adults have credit data filed by private credit bureaus. These countries have almost 100% of their adult population’s credit information in their respective credit bureaus’ data bank. Heading the list of countries with a 100% share of adults with private credit bureau coverage are Ireland, Australia, Iceland, United States, Germany, Sweden, South Korea, Costa Rica, New Zealand, Canada, Norway, Mexico, Argentina, Italy, Peru, Slovenia, Puerto Rico, Uruguay, United Kingdom, Croatia, Japan, and Serbia. The following countries have lower share of adults with private credit bureau coverage. These countries include Hong Kong, where 96.0% are covered, followed by Armenia (94.1%), Poland (91.0%), Macedonia (89.3%), Colombia (88.7%), Hungary (88.6%), Fiji (82.4%), and Kazakhstan (81.4%).
Significance of Coverage
Private credit bureaus offer a significant contribution to the form and function of a nation's financial sector. The data they provide offer information with regards to good credit risk management to banks and non-bank financial institutions. The credit market depends on credit bureaus and the credit report information they provide. Financial regulators also obtain information regarding the current credit market by accessing borrower’s and banks’ interconnected credit data and credit risks. These information and data enables regulators to supervise the credit market.
Banks and non-bank financial institutions alike comprise an important sector of a country’s economy. Credit reporting systems support these financial establishments and can help alleviate market failures in such events. Credit approval selection difficulties are reduced which results in better debtors which is important in decreasing default risks. The credit approval process takes up to three credit bureaus credit score reports for credit worthiness of a borrower. However, some lenders avail of only one credit report to approve the borrower. Sometimes inaccuracies also occur with credit reports that contain erroneous information while others exclude correct information.