Tuesday, April 21, 2009

FAQ: What is a credit bureau?

Many recent news articles have reported on the opening of the first private credit bureau in Oman. These reports raise the questions of what exactly credit bureaus do and what does the opening mean for Oman?

Credit bureaus collect information about consumers and companies from various sources and sell it to other entities, such as financial institutions, that use it to assess risk and credit worthiness. For example, a credit bureau may collect information about a consumer’s payment history, total liabilities, and criminal background, compile this information into a report, and sell it to a bank. The bank will use the report to determine the level of risk involved with giving a loan or other credit to this consumer. Based on the risk level, the bank will determine what terms to offer the consumer on the loan.

Credit bureaus in Oman will enable banks to make more informed decisions in lending to consumers. Consumers with good credit should be able to obtain better loan terms and interest rates because the bank can be confident the risk is low and the loan will be repaid. Consumers with poor credit histories may receive less favorable terms because the risk to the bank that the consumer will default on the loan is higher.

Currently in Oman, information about a consumer’s credit history is not readily available and it is difficult for banks to gauge risk levels and customize the terms of the loan. Thus consumers with good credit share the risk of consumers with bad credit because banks simply do not have the information to make informed decisions about individuals and tailor loans accordingly.

Some consumers have raised concerns about the security of their information and potential confidentiality breaches. Credit bureaus in other parts of the world typically employ very high security standards with respect to the information they obtain in order to avoid the serious problems associated with such breaches, though breaches have occurred.

In addition, consumers have raised issues about how it is possible for a credit bureau to obtain the information for the credit report in the first place. Typically banks or other financial institutions provide information about consumer bank accounts, loans, liabilities, income, and payment history to the credit bureau. Publicly available court records may also be a source of information. The terms of individual agreements between consumers and banks or financial institutions determine what banks and financial institutions are permitted to do with the consumers’ information.

While these concerns are commonly raised in connection with credit bureaus, it is expected that the introduction of credit reporting to Oman will provide distinct advantages to both consumers and financial instructions.