Credit Bureaus and How Do They Work?

Credit bureaus are companies collecting and maintaining credit information of individuals and businesses. They gather data from various sources, such as lenders, creditors, and public records, and create credit bureau reports based on your credit history.

This includes your payment history, outstanding debts, and public records. Lenders and creditors use these credit reports to assess your creditworthiness when extending credit, such as a personal loan.

Credit bureaus collaborate with different lending institutions and credit providers to support them in making the right decisions related to loan approval. The primary objective of credit bureaus is to ensure that credit providers have necessary details before approving loans to individuals and corporations. 

Generally, the clients for the credit bureau agencies consist of credit card issuers, banks, mortgage lenders, and other firms which deal in personal finance and lending sectors.

Credit bureaus have no say in deciding the credit grants to individuals or corporates. Instead, they focus on collecting and generating statistics and other information related to the credit score of individuals or organisations and extend that information to the lenders, who in turn, make the decision.

Credit bureaus collect information on individuals and businesses from various sources, including creditors, lenders, public records, collection agencies, utility companies, landlords, and consumer inquiries made by lenders.

This information is used to create credit reports that lenders and creditors use to assess your creditworthiness. The Fair Credit Reporting Act (FCRA) regulates credit bureaus and provides consumers with certain rights regarding their credit information.

The Credit Information Companies (Regulation) Act, 2005 is legislation passed by the Government of India to regulate the functions of credit information companies operating in India.

This act also supports the efficient distribution of credit to responsible borrowers and helps lenders make decisions regarding all credit disbursement matters.

Credit information generated by the credit bureaus and other credit information companies can be shared with the specific parties for utilisation with regards to the following main functions: -

• To make credit decisions highly effective

• To find out the concurrent borrowers and loan defaulters

• To support in maintaining the minimum levels of adverse selection of customers

• To carry out the risk analysis of the customers

• To help maintain the statutory and regulatory functions in the credit sector

• To enable individual consumers to know about their credit information

There is no definite answer as to which credit score matters most to the lending agency for deciding loan approvals. Also, whether all five credit scores are required, or the lenders prefer some specific ones cannot be clearly demarcated. 

Generally, lenders have their favourite scores on which they rely for the decisions related to loan approvals. Lenders most commonly check your CIBIL score before approving loans.

Indian Credit Rating Agencies (CRAs) calculate the safety factors or risks in the investment options provided by the companies, while credit bureaus, also known as credit information bureaus, generate credit scores and reports concerning the borrowers in the country. 

Credit bureaus are involved in evaluating the borrowers' creditworthiness and debt repayment worthiness which supports the lenders in assessing the risks better. Although credit rating agencies and credit bureaus generate financial information for individuals and organisations, the type and details of the information generated vary. 

Furthermore, the entities described by those statistics and the agencies using this information are from varied sectors. Hence, if you want to check your CIBIL/credit score, you can access the same at Bajaj Markets.