Financial Literacy: Understanding Credit Reporting Systems

Jul 16, 2017 News

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Dr. Terence Smith, Deputy Governor, Bank of Guyana

 

Financial literacy and credit reporting systems

Financial education without financial inclusion is of limited value.  That is why strong financial

literacy programmes improve not just the knowledge of participants but also their financial behaviour and when necessary, their access to financial products, services and markets.

To have access, financial infrastructure must be in place to offer financial services to all citizens including, the underserved segments of the population and the economy.  Therefore, full inclusion, which includes reaching new and underserved markets, must include effective credit reporting systems.

Credit reporting systems are very important in today’s financial system.  The World Bank reports that, “Creditors consider information by these systems a primary factor when they evaluate the creditworthiness of data subjects and monitor the credit circumstances of consumers. The information flow enables credit markets to function more efficiently and at a lower cost than would otherwise be possible.” 

In fact, the Center for Financial Inclusion suggests that, “Effective credit reporting systems enable financial institutions to learn about the past behaviour of prospective clients efficiently and from reliable sources.  When that information includes people who are relatively new to formal financial services, financial institutions are enabled to provide them a deeper array of product offerings or even to serve them for the first time.  In this way, credit reporting systems can contribute significantly to financial inclusion.”

Credit reporting systems in Guyana

The Credit Reporting Act of 2010 set forth the guiding principles that govern the manner and means of the operation of a credit bureau in Guyana.  As a result, the Bank of Guyana licensed Creditinfo to operate a credit bureau on July 15^th, 2013 and is its designated supervisory authority.

According to Creditinfo, “a credit bureau is an independent organization that collects, stores, and organizes credit information about consumers and businesses.  This information is sourced and collected from lenders such as banks, credit unions and microfinance organizations, as well as providers of various alternative type of credit.  Alternative credit information includes data from hire purchase companies, telecommunication companies, and utility companies such as Guyana Water Inc. and Guyana Power and Light Company.  All data collected is then subjected to rigorous process of matching, cross checking, merging and analysing before it is used to create credit reports.” 

Your credit bureau and you, what you need to know

Listed below are a set of frequently asked questions that are documented in Creditinfo’s pamphlet, “Your Credit Bureau and You, what you need to know.”

• What is a credit report? A credit report is simply a summary of all credit related and public information that the bureau has collected and stored on a particular data subject i.e. individual or business. This means that when someone applies for some form of credit, the prospective lender can check to see what kind of borrower they have been in the past and can use this information to determine how diligently they are likely to repay in the future.
• What kind of information is shared in my credit report? A typical credit report contains detailed biographical data and, depending on the various credit obligations of the borrower, will provide comprehensive details of payment patterns on credit facilities such as loan accounts, overdraft facilities, credit card accounts and hire purchase accounts, as well as telecom facilities and utilities accounts. In addition, the credit bureau may include information on any guarantees that exist, as well as information that are publicly available from court registries and other statutory entities.
• What is a credit score? A credit score is a statistical estimate of the creditworthiness of a prospective borrower. It also contains a predictive component that, together with the score, offers an approximation of the probability that this borrower will default on any credit facility offered in the future, based on information, data trends and other characteristics available in the vast store of information collected by the credit bureau.
• How safe is my credit information collected by Creditinfo? Creditinfo has ensured that all its data will always be one hundred percent safe from unauthorized access.
• Who can see my personal information? The Credit Bureau has very strict operational guidelines and policies regarding confidentiality of data.  No one can walk off the street and request a credit report on anyone but themselves.  Alternatively, only designated lenders identified under the credit Reporting Act can do so with the consent of the data subject.
• How can I get my credit report? Creditinfo will provide one free credit report every 12-month period to individual consumers. Any additional report thereafter is available at only a nominal fee per copy.
• How can I improve my credit score? The Credit Report and score reflect credit payment patterns over time with more emphasis on recent information.    

General principles and effective oversight

Credit reporting is a vital part of a country’s financial infrastructure and is an activity of public interest.  According to the World Bank, “The key considerations concerning credit reporting systems can be broadly grouped around the following topics: i) data; ii) data processing; iii) governance arrangements and risk management; iv) legal and regulatory environment; and cross-border data flows.”  Concerning oversight, credit-reporting systems should be subject to appropriate and effective regulation and oversight by a central bank, a financial supervisor, or other relevant authorities.

Current issues and challenges

According to the Center for Financial Inclusion, credit reporting around the world has grown significantly over the last several decades.  Despite this growth, credit reporting remains underdeveloped in many counties.  Many markets are evolving from a past in which credit reporting may have been limited to commercial banks, offered by only one service provider, with data only on loan defaults of blacklisted clients and updated infrequently.

Client information must first and foremost be protected, requiring that necessary legislation curtail the potential exploitation or misuse of client information by actors with profit-seeking interests.  In fact, client data privacy must be respected with rules that give clients some control, such as access to their records, a way to correct errors, and some say over third party use.

Because of the multiple interests involved, the process of establishing a well-functioning credit reporting system requires sustained coordination among different types of actors.  The World Bank and the International Finance Corporation have taken leadership as multinational donors to support this work.

Next week we will discuss Cash Flow Planning and Retirement.  Thanks for all your comments and support.  As usual, please send your comments or questions to [email protected]

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