Key Terms Explained
Credit Bureau/Private Credit Registries
Editing/ Building on existing entry: http://en.wikipedia.org/wiki/Credit_bureau
There are two main types of credit reporting institutions, namely the credit registries (public credit registry) and credit bureau (private credit registry). Both agencies collect a database of information on borrower, but generally differ in sources of data, types of data collected, and distribution policy of data.1 A credit bureau or consumer reporting agency (United States), or credit reference agency (United Kingdom) is usually a privately owned company that collects information from a wide variety of financial and nonfinancial entities, including microfinance institutions and credit card companies, and provides more comprehensive consumer credit information with value-added services such as credit scores to private lenders.2 Generally, credit bureaus strive to collect as much data as possible and thus cover smaller size loans as compared to credit registries. Consequently, data collected by credit bureaus is often better geared to tracking the history of individual borrowers and monitoring the creditworthiness of clients.3 Private credit reports are also typically available to broad spectrum of financial and nonfinancial businesses as well as government agencies.
Credit information such as a person’s past loan performance is a powerful tool to predict his future behavior. These credit information institutions reduce the extent of asymmetric information between borrowers and lenders, which alleviate problems of adverse selection and moral hazard. For example, with quality credit information, lenders can better screen and monitor borrowers as well as avoid giving loans to high risk individuals.4 This information assesses the credit worthiness of a borrower and can affect the interest rate and other terms of a loan. Additionally, decision-makers in areas unrelated to consumer credit—including employment screening, tax collection, underwriting of property and casualty insurance—increasingly depend on credit records, as studies have shown that such records have predictive value.5 Consumers, on the other hand, benefit from this as there is less information monopoly by the banks.6 It also provides incentives for borrowers to repay their loans on time.
1 Edited by Margaret Miller. (2003). Credit Reporting Systems and the International Economy. Cambridge, Massachusetts: MIT Press.
4 Edited by Margaret Miller. (2003). Credit Reporting Systems and the International Economy. Cambridge, Massachusetts: MIT Press.
5 Avery, Robert B.; Calem, Paul S.; Canner, Glenn B. (2004). Credit Report Accuracy and Access to Credit. Federal Reserve Bulletin, Summer 2004. Washington, D.C. 20551: U.S. Federal Reserve. pp. 26.
6 Edited by Margaret Miller. (2003). Credit Reporting Systems and the International Economy. Cambridge, Massachusetts: MIT Press.