What is a Credit Bureau or a Credit Reference Agency?
Credit Bureaus or Credit Reference Agencies are organisations which collect information on individuals and / or legal entities to help a creditor decide if they should grant credit to a customer.
Credit Bureaus have been existence for a considerable period of time. The first Credit Bureaus were founded in 1830 in New York and in Europe at the end of the 19th century.
What kind of data is held by Credit Bureau?
Credit Bureaus hold information on consumers such as identification data (name, date of birth, address and a unique identification number if this is legally allowed) and data concerning their credit history. However, the Credit Bureaus do not hold information on what you earn, your nationality, your employment or other sensitive personal data (e.g. religion, political preferences).
The credit history of a consumer can consist of positive and / or negative information, depending on the credit bureau’s system and the national laws. The national laws define the legal environment in which the Credit Bureau operates. The laws may define what kind of data and the degree of details that can be stored. In addition, data protection issues, banking laws and other regulations have to be respected, depending on the national legal system. In the EU, European regulations have to be followed as well.
Examples of negative information are the non-repayment of a credit or the non-payment of invoices from a mail order business or bankruptcies and / or insolvencies. Positive information includes data on outstanding and settled credit agreements, invoices from a mail order business that have been paid according to the contract; the customer has a bank current account or owns a credit card etc. The precise type of data which is stored also varies according to the bureau’s system and the applicable legislation.
It should be noted, that where a credit bureau stores both negative and positive data, the majority of the information will be positive.
What are the advantages of a Credit Bureau for companies?
Credit Bureaus offer a number of advantages to companies looking to grant credit. Firstly, they reduce the companies’ financial risks as they allow a company to check whether the client is solvent or not before they grant them credit reducing the likelihood of bad debts and therefore enabling companies to offer the products at a competitive price and reducing the cost to the customer.
Credit Bureaus provide companies with different kinds of information – depending on their data base and the legal environment. The services can for example be information about the customer’s creditworthiness, about their identity, about their account number, as well as address investigation and address updating.
A key factor in the ability of Credit Bureaus to help the companies to assess whether they should grant credit is the extent of the information they hold. The broader the data base, the more effective the credit decisions of the company will be. So for example the addition of non-bank data to the credit bureau system will help all companies have a deeper understanding of their customers and make better decisions.
However, it should be noted that it is the company itself which decides if they will grant credit to a customer based on their own credit risk strategy and not the credit bureau.
Who uses a Credit Bureau?
The most common clients of Credit Bureau services are banks, but also telecommunication, insurance, mail order and / or utility companies.
The types of clients that use a Credit Bureau vary from country to country though and depends on the legal environment of the country as in some countries banks and non-banks have to be treated separately.
What are the advantages for consumers of a Credit Bureau?
The main advantage of a Credit Bureau for consumers is that they help individuals in their economic / financial life.
With a credit bureau it is possible for the consumer to apply for a credit at a bank which does not know the customer. So even if the consumer did not have an existing relationship with that specific bank (i.e. a new bank or via internet), based on the information of the credit bureau, the bank can quickly make a decision.
Furthermore, the consumer can place an order with for example a mail order business and pay afterwards on account, he can also open up a contract with a telecommunication company or buy a car on credit – even if the respective companies have no prior knowledge of the consumer.
The information held by the credit bureau helps the consumer prove his creditworthiness and provides them with the ability to choose from a wide range of facilities offered by many different companies.
The second advantage is that Credit Bureaus help consumers from becoming financially overindebted. Based on the information held of the Credit Bureau and other application data, a company can decide not to grant new credit on the basis it would stress the financial situation of the consumer too much. To be able to accurately assess whether someone is overindebted it is important that as much data as possible is shared with the Credit Bureau – not only bank credits influence the consumer’s financial situation but also mortgages, car financing, mobile contracts and others financial arrangements
Thirdly consumers benefit from the existence of Credit Bureaus as they help reduce the cost of credit. Credit Bureau data helps companies help reduce their risk of default and optimize the decision-making process. In general, the more positive information a company can obtain about a consumer the better the credit assessment of that consumer, the lower the chances of non-payment which reduces costs and therefore allows companies to offer competitive interest rates.
What rights do consumers have?
It is extremely important for Credit Bureaus that consumers understand what data they hold, what it is used for, how they can access the data and how they can amend/restrict its use.
All Credit Bureaus provide a consumer with access to his own data. All the consumer needs to do is contact his Credit Bureau and ask for a report about himself / his own data.
Secondly, Credit Bureaus provide the consumer with the ability to update or correct his data where the data maybe is wrong or inaccurate.
Thirdly, the consumer has the right to object the processing of his data. These rights vary according to the local legal environment.
The Association of Consumer Credit Information Suppliers (ACCIS) represents the largest group of credit reference agencies in the world. ACCIS brings together 42 members across 29 European countries and 10 associate and affiliate members from all other continents.
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