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What are Credit Reporting Agencies?

10/1/2013 11:53:53 AM | by Anonymous

Credit Reporting Agencies

Credit reporting agencies are companies that collect information and provide consumer the credit information on individual consumers for various uses from different sources. They are organizations that provide information for bill-paying habits and individuals’ borrowing. They can also be referred to as credit bureaus. The credit information of a person’s previous loan information can be a powerful tool to predict his future behavior. This can reduce the effect of asymmetric information between the lenders and borrowers and alleviate problems of adverse selection and moral hazard. An example would be if there is adequate credit information that could facilitate lenders in monitoring and screening as well as avoid giving loans to high risk individuals.


This could help lenders to assess credit worthiness, can affect the interest rate, the ability to pay back a loan and other terms of a loan. However, interest rates are not the same for everyone instead they can be based on risk-based pricing which is a form of price discrimination based on the different expected risks of different borrowers. Consumers whom have poor credit repayment histories or court adjudicated debt obligations like bankruptcies that will need to pay a higher annual interest rate than consumers who don’t have these factors or tax liens.


Additionally, decision markers in areas those that are unrelated to consumer credit may include employment screening and underwriting of casualty insurance and property can increasingly depends on credit records that show predictive value. At the same time, consumers can benefit from a good credit information system because it can reduce the effect of credit monopoly from banks and they provide incentives for borrowers to repay their loans on time. Besides, it is important for consumers to regularly check their credit history to make sure that the information is correct.


The credit reporting agencies collect and aggregate financial data, personal information and other alternative data on individuals from a variety of sources called data furnishers which the bureaus have a relationship with. They are typically lenders, creditors, debt collection agencies, utilities and courts that a consumer has an experience or relationship with. These data furnishers report their payment experience with the consumer to the credit bureaus and the data provided by them are collected by bureaus and aggregated into the credit bureau’s data files.


The information is made available on request to customers of the credit reporting agencies for the purposes of credit scoring, credit risk assessment or for other purposes such as leasing an apartment or employment consideration. However, given the large number of borrowers, these credit scores tend to be mechanistic and to simplify the analytical process for their customers, the different credit reporting agencies can apply a mathematical system to provide a score that the customer can use to provide more rapidly assess the likelihood that an individual will repay a particular debt given the frequency that other individuals in a similar situation have defaulted.


And most consumer welfare will advise many individuals to review their credit reports at least once a year to ensure that they are accurate.

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