8 Important Questions about Credit Bureaus
With talk of a Bahamian Credit Bureau on the horizon, you may have some important questions. What is the role of a credit bureau? And how does it affect your borrowing habits? Will the economy be better off with it? If you have similar queries, then continue reading, because we break it down for you!
What is a credit bureau?
A credit bureau is a company that collects, stores, and maintains credit information of consumers in order to provide the information to creditors and consumers in the form of a credit report. Keep in mind that in order for a credit bureau to be effective, all creditors in an economy (such as banks and utility companies) must participate to ensure that the true nature of an individual’s credit is reflected. All of the information collection by these organizations is used to create a credit report on each consumer. The credit report would include the credit score of the consumer.
What are some key terms that I need to understand?
- Credit: Debt that should be paid off.
- Creditor: The person or company (lender) to whom money is owed. For example, if you borrow $5,000 from your local bank, the bank would be the creditor. Creditors would provide most of the information contained in a credit report.
- Creditworthiness: The creditor’s assessment of your ability to actually repay money owed based on your credit score (explained next).
- Credit Score: This is a number that is analytically calculated to estimate how likely it is that an individual will repay their debt. This is based on a number of factors including the amount of credit/debt you currently have.
- Delinquency: This happens when you are late or behind on your debt payments. Delinquencies would reduce an individual’s score.
- Default: This is a more severe form of delinquency in which you've stopped paying your debt. Once the loan is in default, the creditor may decide to take extreme actions to recover the money owed to them (such as the repossession of property). Defaults would significantly lower an individual’s score
Why does it matter to you?
Many persons have been able to hide personal debt from different institutions in the past, due to the lack of a credit bureau. A credit bureau will greatly reduce the continuation of this practice because it will get credit information on borrowers from many different creditors.
Creditors look at credit reports to determine whether they will approve your loan, at what interest rate and on what terms based on your history of paying off loans. A poor credit score will make it more challenging and costly for individuals to access credit. On the other hand, a high credit score should provide benefits for respectable borrowers. Before the credit bureau, some creditors apply general interest rates across the board due to a lack of credit information on borrowers. With a credit bureau, a more creditworthy borrower with a high score should be able to attract lower interest rates and terms than a borrower with a lower score. As such, this would incentivize individuals to monitor their scores and maintain good borrowing practices.
How will creditors benefit?
In The Bahamas today, credit institutions face significant risk when conducting lending activities. The lack of a credit bureau leaves these institutions to assess their customers based on honesty and trust, with the help of certain documents (e.g. pay stubs containing salary deductions). Outside of this, there is no true means to validate information as other creditors owe a duty of confidentiality to their customers. With the collection and maintenance of credit scores, creditors no longer need to rely on traditional methods of assessing risks associated with lending. Creditors will be able to get an estimation of risk as higher credit scores should equate to higher creditworthiness and a reduced likelihood of loan defaults.
A win-win situation
Let us use a hypothetical situation to illustrate this benefit to both the creditor and the borrower. Jane Doe goes to ABC Bank to seek an auto loan for $15,000. Upon meeting with a loan officer, she is told that auto loans usually start at 10%, with a down payment of 10% required. However, Jane is a savvy borrower and quickly provides her credit report to the officer with her score of 800. Jane Doe then asks the loan officer if it is possible to get a lower interest rate. Given her strong credit history, the bank reviews and returns with a proposal for Jane. The bank offers to lend her the funds at an interest rate of 7.5%, with the same down payment rate. While these changes may seem minimal, over time they add up to huge savings for Jane. For the bank, knowing the high credit score of Jane provides the bank with the ability to class the loan as high quality and provide more favorable terms. The banker will also sleep better at night knowing that the chance of Jane repaying her loan is high. To understand the savings on the loan in the example above, use our loan calculator here.
How will information be collected?
Information to calculate your credit score is collected from financial institutions and other businesses.
The type of information that will be collected by the credit bureau in the Bahamas includes:
- Your identity, including your name, your date of birth, your passport number, your drivers' licence number and your address; and
- Your credit history, including outstanding debt, how timely you were in repaying debt (including delinquency and default information), etc.
Will the exchange of information breach confidentiality laws?
Fortunately, the credit score will not show that you have a loan at your furniture store or for your car at your bank of choice. This information will simply be used by the credit bureau in the calculation of your score. As such, this sensitive information would not be disclosed in your report and does not constitute a breach of confidentiality. Another added benefit is that as a borrower, you will have to provide permission for a creditor to access your credit report.
If I disagree with my credit score, what should I do?
According to the Credit Reporting Legislation, if you disagree with your credit score, you contact the credit bureau. Once this is done, the credit bureau must investigate the issue for you by querying the information provided by the creditor. If the information is inaccurate, the credit bureau will correct it and inform everyone who has recently received your credit report of the correction. The credit bureau will also tell you of what it has done and will provide you with a copy of the amended report.
What are my rights as a consumer?
According to credit reporting legislation:
- Limited information can be reported about you. A credit bureau can only collect certain classes of information for its credit reporting database.
- You are entitled to request a free copy of the credit information held about you by a credit bureau on an annual basis as well as when you are denied credit because of negative information contained in your credit report.
- Only certain people can access your file for certain purposes.
- In most cases, access to your credit information can only take place with your authorization.
- Credit bureaus must take reasonable steps to ensure the accuracy of the information they hold and act promptly to correct any errors of which they become aware.
- You can dispute inaccurate information with the credit bureau.
- You have the right to make a complaint. Each credit bureau must maintain an internal complaints procedure and have a designated person to facilitate the fair, simple, speedy and efficient resolution of complaints.
Get Money Smart
The introduction of a credit bureau will provide a fresh start for every Bahamian as our credit history will be collected going forward. Use this window of opportunity before the full implementation to get your borrowing habits in order and tidy up any loose ends you may have in your financial situation. This will ensure that you can “Get Money Smart” through an improved borrowing profile once the bureau is operational. For tips on how to get money smart, read our article entitled Want to Stop Living Paycheck to Paycheck?
For more information, check out the Draft Credit Reporting Regulations, 2018 here.