157. What do you know about credit bureau and its role at the financial services market?

Credit bureau is an agency which collects and sells information about the creditworthiness of individuals. A credit bureau are also called as consumer reporting agency (United States), or credit reference agency (United Kingdom). The largest credit bureau in Ukraine are The First Credit Bureau of Ukraine, Ukrainian Bureau of credit history, International Bureau of credit history.

A credit bureau collects information from a range of data sources and provides its customers with valuable credit information, which enables them to make better decisions. The collected data can include general information about individuals and companies, ranging from industry codes, home addresses, board membership, financial

data regarding negative and positive payment information and other economic details.

Market structures can be enhanced by having credit bureaus or information exchange platforms in terms of facilitating data sharing, credit granting and application processing. They can also help to improve in 3 key areas:

*Over-Indebtedness--Over-indebtedness is more efficiently dealt with by credit bureaus than organizations acting independently. Bureaus have access to historic data, which traces past loans and forms the basis for future decisions. In addition to information from both financial and various non-financial organizations, credit bureaus can also consolidate information from different government registers to verify an individual's salary and gain details on existing loans. This helps to further assess the likelihood of repayment for outstanding or future loans.

*Credit Risk--A credit bureau can identify credit risk by observing a worsening payment history. If the payments are overdue, this can be recognised and the decision to issue any further loans can be considered with this information in mind. This serves as an advanced warning of potential payment problems ahead.

It can also gather information to calculate a credit "score" for the debtor or credit applicant and the risk of default, which reflect the relative risks and gauges the likelihood of repayment. As the credit information becomes more complex, it is difficult for one individual to assess the information given. The credit bureau can deal with numerous data items, in order to compute an accurate score.

*Fraud Prevention--Another function of a credit bureau is to identify and avoid fraud. Since credit bureaus have access to an extensive database of customers, they can cross-reference personal details to make sure loans have not been taken out in different names when it is actually the same person, or a group working in collusion.

Credit bureau reduce the effect of asymmetric information between borrowers and lenders, and alleviate problems of adverse selection and moral hazard. This helps identified effect on the interest rate and other terms of a loan. Interest rates are not the same for everyone, but instead can be based on risk-based pricing, a form of price discrimination based on the different expected risks of different borrowers, as set out in their credit rating. Consumers with poor credit repayment histories will pay a higher annual interest. Additionally, decision-makers in areas unrelated to consumer credit, including employment screening and underwriting of property and casualty insurance, increasingly depend on credit records, as studies have shown that such records have predictive value. At the same time, consumers also benefit from a good credit information system because it reduces the effect of credit monopoly from banks, and it provides incentives for borrowers to repay their loans on time.