Creditors can face a tough call when trying to decide whether a particular client is fit to be lent credit or not. Knowledge of a client’s credit history will shed insight and lead to a more informed decision, mitigating risk in the process, but such knowledge requires time and specialised knowledge to access.

Enter the credit bureau, a data collection agency that researches and gathers account and individual credit information from various creditors and provides that information to a credit reference agency and to private lenders. The objective is to give these financial entities full visibility about a potential client’s financial situation before deciding whether to extend or grant a loan.

 A credit bureau typically follows a very thorough process to collate an extensive report. It collects information from a wide variety of financial and nonfinancial entities such as identity, public records, and the positive and negative payment history, including microfinance institutions and credit card companies. After finalising all research, the bureau provides comprehensive consumer credit information with value-added services, such as credit scores.

The primary purpose is simple – ensuring that creditors have all the information needed to make lending decisions. Typical clients for a credit bureau include banks, mortgage lenders, credit card issuers and other personal financial lending companies (such as telecommunication operators, car agents and Buy Now Pay Later retailers), that require credit information to decide whether their borrowers are creditworthy.

It is worth noting that credit bureaux do not make the decision of whether or not credit will be granted or extended to an individual or not. Contrary to popular misconception, they do not provide a ‘black-list’ or ‘negative list’ of borrowers. The role of a credit bureau is simply that of researcher and collector, synthesizing the information about an individual’s credit score for the lenders to use in making their decisions. In fact, part of a credit bureau’s customer base includes consumers who would like information about their possible credit score, and these always receive the same service-information about their credit history.

Transparent credit information is a prerequisite for sound risk management and financial stability. Through a credit bureau lenders are in a position to better classify applicants, save time and reduce cost on borrowers’ evaluations, offering prices and interest rates specific to the risks and reducing the overall system risk. Moreover, these services also help borrowers build a good credit reputation, providing improved access to finance and the ability to obtain preferential rates, while enabling them to monitor and improve their credit records.

On a larger scale, credit bureaux enable regulators to monitor the national credit allocation and obtain comprehensive and consistently updated data on borrowers and lenders, in turn enabling an effective credit risk monitoring for the economy, allowing credit expansion without compromising the availability of credit, reducing the risks of non-performing loans and possibly anticipating the probability of defaulting on loans in the economy.

In essence, the ultimate scope of a credit bureau is to collect both positive and negative data that would eventually transmit an extensive view of an individual’s or commercial entity’s credit history. Clients who have nothing to hide within their credit history need not have any concern about the process as it only exists to weed out those who habitually default on payments or clients who pose a risk of fraud.