The introduction of a Credit Bureau can often be greeted with concern or scepticism; however the experience of the US and Western Europe clearly demonstrates their benefits. There are three core benefactors, financial institutions, the economies and consumers. The arguments for why Credit Bureaux should be seen as friends not foes are explored in this article.

The active credit industry is an indicator of a healthy consumer economy, which brings benefits to the consumers and the country as a whole. The recent boom in lending and the increasing competition among banking and non banking credit institutions has led to interest rate reductions and numerous new credit offers in Bulgaria. Loans have become accessible to a bigger circle of consumers due to improved interest levels and loan conditions, as well as the aggressive credit policy of many banks in Bulgaria, As a result of this increase in activity the need for a Credit Bureau in Bulgaria was recognised.

The process of easy and accessible credit hides some risks for the consumers as well as for the credit institutions. These risks can be summarised as lack of knowledge and understanding of consumers in regards to loan conditions and the responsibilities that come with them, overindebtedness and the inability at a later point for the loan to be serviced (i.e. the monthly instalments to be paid on time).

To avoid the risk of granting loans to individuals who are not able to service the loan, financial institutions such as banks, leasing companies, finance houses and even retailers in most developed credit economies around the world have access to the credit history of their customers. Moreover, if an individual or a company does not have a credit history, it is often very difficult for them to obtain a loan from a bank or get a leasing contract from some servicing institution.

The companies that maintain such databases, with the purpose of credit information sharing between different institutions, are called Credit Bureaux. In the business environment of Western Europe and North America the Credit Bureau has existed for over 50 years, They are respected and valued components of an effective consumer economy, being accepted by both financial institutions and consumers alike. In some countries, Credit Bureaux have been providing credit histories about consumers for the last 30 years. The report in which the credit data is described is called a credit reference.

The Credit Bureau is an electronic register for an exchange in real time of data on past payment behaviour of borrowers (individuals and companies) and their current debt servicing status. The purpose of the Credit Bureau is to provide credit references to the borrowers as well as to different types of credit organisations such as banks, leasing companies, telecom operators, retailers, credit cards issuers etc. The information from the credit references is used for assessment of the credit risk, indebtedness and creditworthiness of the borrower when he/she applies for a new loan as well as for verification of the applicant’s identity.

For many years, the Credit Bureaux appeared to be the only source of information for creditworthiness assessment of newly registered companies, Credit Bureaux exchange credit data, details of directors and owners personal debts, personal credit histories and their behaviour in previous companies as borrowers.

Requests for credit references from the lending institutions to the Credit Bureau are made only after written consent is received from the consumers, in compliance with the personal data protection acts. Creditors have access to the credit references when the consumer would like to receive details regarding the conditions of the prospective loan and also when they check the validity of the information for the customer. The Credit Bureau does not indicate who should receive credit and who should not. Its role is to provide data, which helps creditors in their credit decision-making and the protection of consumer’s interest. Thus customers who have been good payers can receive loans with better conditions, and financial institutions protect themselves from granting credit to individuals who are already financially overcommitted.

What is the credit reference?
The credit reference represents a report with detailed information about how many and what type of loans the consumer has, the payment history for them and links to related people as well as information for new credit applications. It contains data for open accounts as well as for credit accounts which are already closed and the reason why they have been closed.

The credit reference describes the actual status of the credit indebtedness and the payment status of the data subjects – the outstanding balance of each loan is given separately, as well as the total amount of the loans calculated in Leva (in case any of the loans have been granted in a different currency). It also shows the amount of each monthly payment and the total amount of the monthly payments on all opened credit accounts. This enables the evaluation of whether the individual is able to pay back a new loan or if the undertaking of such an obligation would lead to the inability of servicing the already existing loans.

What are the benefits?
The purpose of the Credit Bureau is to improve the availability of information on the participants in the process: financial institutions-products-clients. The Credit Bureau encourages a responsible offering from creditors and the rational use of credit from consumers. In the same way that creditors want to reduce the risk of credit granting to unconscientious individuals, consumers themselves want to know what their chances are for obtaining a new loan.

When consumers apply for a loan or they make a request for the purchase of goods by leasing, they must give consent for their credit history to be checked. Thus the individual facilitates the credit granting organisation in the assessment of their creditworthiness, as it can negotiate better loan conditions. Good credit history, confirmed by a good credit reference is used as additional collateral and gives people the privilege to receive better loan conditions. It also reduces the time and cost of loan application processing and credit decision making.

Consumers can however request their credit reference long before they complete the loan application documents and have talked to potential creditors regarding the future credit which they need. Thus, they will receive a complete picture of their own financial status and can decide if they are able to take another payment obligation and at what terms and conditions.

Consumers can get their credit reference at any time, even if they do not need a loan at the present time, just to be informed of their current credit status. Besides having the opportunity to assess whether they have the capibility of servicing new loans without the risk of indebtedness, the additional benefits from the credit references for consumers include:

1. Precise and in-time repayment of the outstanding loans
When the consumer has more than one type of credit, e.g. they bought a TV in instalments, a car with leasing, pays with a credit card and they have a mortgage loan, the easiest way to understand whether they have not missed a payment on the current credits is to review the credit reference. It will show the figure of overall credit indebtedness, whether there was a late payment, its amount and the number of default days. If the individual is well informed about the conditions concerning his/hers financial obligations, they could effectively control the loan repayments.

2. Which institutions have made a search on the consumer
The credit history shows who has received data for the consumer, and also when, where and for what credit amount he/she had applied for. The consumer can check whether they have really granted permission to those institutions to ask for their credit reference. Therefore the misuse of personal or false data could be prevented, and this can also act as a protective measure against identity fraud. Sometimes a large number of enquiries for a certain applicant from different organizations can be a sign that the person is making credit enquiries without being serious about receiving the loan. This market survey is not a problem, but at the same time it is good for the credit institutions to be informed that for the moment the consumer is just checking upon the best available loan offer.

3. Verification of the data contained in the Credit Bureau
Through the credit reference, the accuracy of the person’s data held by his creditors and shared amongst the Credit Bureaux can be verified. It is possible that the credit reference contains no current personal data or does not show a monthly repayment, by requesting their credit report the borrower can spot this and ask the credit institution to correct the inaccurate information.

4. Better communication with the credit-granting institutions
In the case of negative information concerning the credit status, the consumer can prepare themselves for any eventual questions from the financial institution when they apply for credit, with the detailed data from the credit reference. Moreover, when, for example, due to illness or job-loss and reduced income, the person is not able to manage his financial obligations, a rescheduling can be agreed or the borrower can find a way to overcome the difficult stage together with the credit inspector. This way the good status of the credit history of the borrower can be preserved.

5. Better information about the credit behaviour of related parties
The consumer can review the credit indebtedness for all accounts of the joint persons for which they have become a co-debtor, referee or guarantor. Usually these are spouses, but they can also be immediate members of the family. The consumer will have a clear notion of the risk they have undertaken as a guarantor for these people and they will be informed in time if these people start missing their monthly instalments. This preliminary information of the person in the credit reference helps the complications in such cases to be solved. The credit institution should be informed when the persons in a joint credit account have been separated and they do not want to have joint credit history on the account anymore. Furthermore, the consumers themselves can check whether someone has appointed them as a guarantor without their knowledge.

In an economic environment of relatively low interest rates and alluring credit terms, such as we currently see in Bulgaria, a good estimation of the client’s ability to repay back the granted credit is very important. The information from the credit reference allows consumers and creditors to take quick and well-informed decisions regarding the granting of new credit or increasing the limit of an existing credit. Through the use of credit references, the main functions of the Credit Bureau are accomplished, namely – to protect against the issue of credit to over-indebted clients, to encourage consumers to use benefits of credit in a reasonable way and to limit fraud cases with stolen personal data.