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The credit bureau or credit bureau is an entity that collects and consolidates information on users of the financial system. Thus, it tries to cover the largest possible universe of data and people.

The objective of a credit bureau is to classify individuals according to the probability of default. For this purpose, it evaluates the record of current and past loans in banks and other companies.

The credit bureaus, in addition to financial information, record demographic data of the public such as age, sex, level of education, among others.

Characteristics of a credit bureau

The characteristics of a credit bureau that stand out the most are the following:

  • It can be a public or private institution. In the latter case, the authorization and supervision of a state regulator is usually required.
  • It receives information from clients of banks, insurance companies and other entities of the financial system. In addition, you can obtain data from utility companies (water, electricity and telecommunications).
  • Provides reports to financial institutions so that they can more accurately evaluate individuals who come to request a loan. With the records of the bureau, it will be possible to know, for example, if the applicant has outstanding debts with other companies.
  • The user has the right to free access to the information recorded about him or her in the credit bureaus from time to time, for example, six months. This period depends on the legislation of each country.
  • The bureau usually does not show the entire credit history of users. Data can be reported, for example, for the last five years.
  • If an erroneous information is reported about the debtor, he has the right to request a correction from the credit bureau. In some circumstances, the user may be forced to call the intervention of the state regulator for the corresponding correction.
  • In case there is an unpaid debt, the borrower can cancel it and then present a letter of no debt to clear his record.
  • The user will hardly obtain financing if he does not have a good rating in the credit bureaus.

Classification of the credit registry

The classification that the credit bureau makes of the debtors varies according to the institution. For example, they can be separated into groups for each color of the traffic light: Green, yellow and red, going from lowest to highest risk.

Another more elaborate type of classification divides users into five categories:

  • Normal: If there is no delay in the payment of installments greater than thirty days.
  • With potential problems: If the debtor reports a delay of between 31 and 60 days.
  • Poor: If the borrower is already 61-120 days late.
  • Doubtful: When the debtor's delay is between 121 and 365 days.
  • Loss: If the defaulter has already delayed more than 365 days. In this case, the debt begins to be considered bad.

The terms presented in the previous example are particularly applicable to long-term loans such as mortgages. For smaller loans, each category should tolerate fewer days of delinquency.

Credit risk

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