When a client applies for a loan, lenders want to see how the client has fulfilled their obligations on their previous loans. It helps them determine a client’s potential credit risk, calculate their interest rate, and whether or not they should approve their request.
In doing so, lenders and finance brokers rely on credit reporting services to check a potential client’s credit report. If you’re a new broker or lender, below, we’re taking a closer look at credit reporting for finance brokers and the basics you should know. So, read on for more information.
1. Credit Reporting Services: What Are They?
Credit reporting services, more commonly known as credit bureaus, are credit information warehouses for individuals and businesses. These companies collect and maintain credit information and sell it to creditors, brokers, lenders, and consumers via credit reports.
That said, large credit reporting services do more than compile and report consumer credit information. Some may provide several solutions to help lenders and financial institutions make better decisions. So, if you’re looking for a reliable way to assess the credit worthiness of your clients, hiring one could be your best option.
2. Where Do They Get The Information?
Credit reporting services use different sources to obtain credit information. However, their biggest source is businesses like yours, banks, collection agencies, credit card issues, and other financial institutions. These businesses are collectively called ‘data furnishers.’ These data furnishers often voluntarily share information with credit reporting services for various reasons. The biggest reason is that it helps motivate your clients to pay their debts and do it on time.
While the bulk of credit information comes from these data furnishers, credit reporting services also collect information in other ways. They may get the necessary information from public court records or by purchasing information from data aggregation companies.
3. The Types Of Information They Collect
Credit bureaus maintain information on an individual and their credit history from when they opened their first credit account.
Generally, a credit reporting service mainly collects all the information about your credit accounts. These may include:
- Repayment history
- Credit amount used
- Available credit
- Outstanding debt
Public record details such as tax liens, bankruptcy, repossession, and foreclosure
In addition, a credit bureau may also maintain non-credit information about clients, including their previous and current addresses, date of birth, and previous and current employers.
4. Who Uses The Information?
The same creditors sending credit information to credit reporting companies also purchase these credit reports to check a client’s eligibility and risk. As a broker or lender, you use these reports to determine whether to deny or approve an application and to identify the interest rates.
Other than banks and lenders, a host of other companies also turn to credit reporting services to make decisions about an individual. Insurance companies, employers, marketing companies, debt collectors, and landlords request information from credit reporting companies.
5. Hard vs. Soft Inquiries
When you request a potential client’s credit report, you’re essentially making a credit inquiry, and it comes in two types—hard and soft.
A hard inquiry is a request you make when making a lending decision. Generally, you do this when you have a client applying for a small business loan, a new credit card, mortgage, or auto loan. In general, clients will have to authorize them. A hard inquiry can lower your client’s credit score by a few points, but it should have a negligible effect.
Meanwhile, a soft inquiry, also known as soft pulls, typically occurs when brokers or individuals check their credit as part of a background check. For instance, you may check a client’s record without asking their permission to see if they qualify for credit offers. In addition, employers can also use a soft inquiry before hiring candidates. Unlike a hard inquiry, the soft pulls you make won’t affect your client’s credit scores and may or may not be recorded on their credit reports, depending on the credit reporting service.
6. Why Are There Varying Credit Scores For Different Bureaus?
When checking a client’s report, you may obtain varying credit scores from different bureaus. It is normal. Credit scoring services develop unique scoring models to analyze credit reports from several bureaus to provide an easy-to-understand score. Credit reporting services also have their credit scores based on the information they have.
7. Take Note Of Adverse Listings
When reviewing a client’s credit report, there are three crucial adverse listings you need to focus on, which can significantly impact your client’s credit report and rating. These adverse listings include the following:
- Overdue/Defaulted accounts
- Court actions such as writs, summons, and default judgments
Of these, the most likely to arise in most clients’ credit reports are defaults or overdue accounts, which include missing or late payments on obligations. As a lender, you must beware of any adverse listing to help you decide whether to approve or deny a loan. A borrower who has had credit issues in the past is more likely to have them in the future. That said, credit reporting companies (CRCs) help provide this crucial information. That way, you can avoid financial risks by assessing if a client can pay a loan religiously to you.
8. Who Oversees The Credit Reporting Companies?
Credit bureaus and reporting services are privately owned businesses. That said, they are governed and subject to US government regulations designed by the Federal Trade Commission (FTC) to protect consumers and the general public.
In addition, credit reporting services have to follow the Fair Credit Reporting Act, a federal law ensuring that individuals have access to everything in their reports. This regulation also helps protect a borrower’s right to dispute and correct errors, ensuring that only legitimate financial institutions can make inquiries to view a client’s credit report and history.
Credit reports are one of the most significant tools for every financial broker, lender, and other financial institution. Whether a client wants to buy a new home, get insurance coverage, or apply for credit cards, a credit report can help determine their borrowing behavior, credit health, and eligibility. It helps reduce the risk and helps you make well-informed decisions about a client’s loan application.