Credit Risk

Major Benefits of Credit Reporting for Both Consumers and Lenders

Major Benefits of Credit Reporting for Both Consumers and Lenders

February 28, 2023 | Bob Hofmann

Reporting can be a pain point for many lenders. Yet, it’s an important part of ensuring lenders get an accurate picture of a consumer’s financial situation. Thus, there is a growing need for all types of lenders to report consumer credit and account information to consumer reporting agencies (CRAs). Including traditional nationwide CRAs like Equifax, and speciality finance CRAs like DataX and Teletrack.

Reporting a consumer's credit file is fundamental to consumers expanding their lending options. This helps consumers effectively live their financial best. As traditional credit sources become streamlined, use of alternatives has become more prevalent. Benefitting all players in the system: Consumers, Fintechs, Specialty and Traditional Lenders.

Consumer Benefits from reporting

  • Credit invisible consumers (no-file, thin-file, and subprime) have the ability to establish tradelines on their credit files that could improve their credit options. - Especially for the 75% of those consumers who have “thin” credit files*. The lack of data on their credit file limits their lending options, causing them to pay much higher interest rates. According to our research, this improves some by as much as 13-21 points. 

  • Helps increase consumers' credit scores. - Since they help provea responsible financial track record. On-time payments are one of the most important components of a consumer’s credit score. So additional reporting can benefit their credit score.

  • Expands Financial Inclusion - Having these extra reports allows them to give credit to more borrowers, while minimizing their risk as a business. Allowing lenders look to give more responsible consumers of all walks of life a better chance at gaining access to credit. 

  • Helps consumers practice sound financial discipline. Lenders do not want to provide a consumer with a loan that may overextend consumers. Which is bad for the lender and the consumer. As they may be missing critical information about consumer's credit obligations.

Specialty Lender Benefits

Benefits to FinTech's and other Specialty Finance lenders are a bit more nuanced. Reporting loans to the CRAs requires a measure of investment on the lender's part. This comes in the form of time to properly establish reporting practices that conform to the CRAs requirements. This also allows lenders to provide more detailed information to consumers that may call in with questions about their loans being reported to the CRAs. Yet as you see, the benefits of reporting outweigh the costs.

  • Reporting loans to the CRAs can help incentivize stronger payment performance. Since consumers today understand that their payment behavior on loans reported to the CRA’s matters. This often drives them to pay those loans on time vs. delaying or not paying those that are not reported to their credit file.

  • Broad reporting of loans could also help build consumer loyalty with their brand. When Fintech and specialty lenders report it helps consumers establish or build credit. Which can help establish a stronger connection. While, adding the benefit of providing the lender with a bigger picture of total payment history. Which, the lender rewards their customers with better access and terms. As well as, an ability to deepen the financial relationship.

  • The ability to grow their portfolios responsibly. - Proper reporting allows Fintech lenders lending opportunities within an acceptable risk level. As well as lessening the chances of consumers becoming over extended, by opening many loans with a variety of Fintech lenders. Since without this reporting none of these lenders would have exposure to the other loans opened by their peers.

  • Discouraging unscrupulous practices. - Reporting account information to CRAs can discourage fraudulent or risky loan stacking practices. Potentially, decreasing the risk of loss to Fintech lenders. Many lenders check for other active loans before approving consumers to avoid loan stacking. Those who do not report can be at higher risk of getting “stacked” when other lenders do not know about unreported loans.

Traditional Lender Benefits

  • Further insights to the loans extended by Fintechs and Speciality Finance lenders. The volume of loans originated by Fintech and AltFi has increased significantly. Traditional lenders do extend the vast majority of credit to consumers. For traditional lenders having a complete picture of a consumers' obligations is important to ensure sound lending practices.

  • Financial inclusion through more qualified consumers. - Traditional lenders can better assess risk and understand a consumer’s ability to repay by seeing all credit obligations. This includes a consumer’s Fintech and AltFi loans. This more robust data set allows for consumers to get better terms on loans, based on a fuller picture of their payment history. Leading to a broader base of qualified consumers. Helping drive efforts toward greater financial inclusion.

The entire lending ecosystem benefits from broad, accurate and detailed credit reporting. Combining consumer lending data from millions of lenders gives a bigger picture. From which all lenders can make prudent credit decisions that enhance the lives of hundreds of millions of consumers. Further providing an ability for all to benefit including

  • Lenders can evaluate a consumer's application more thoroughly. - Allowing consumers to access the broadest lending options based on their previous track record of managing those loan obligations.
  • Consumers can benefit from their positive payment history. - Helping to prevent excess additional debt because a lender can't see their full payment history. Making increased interest rates and other less desirable payment terms more likely.

BNPL Benefits

BNPL loans present unique challenges, for which Equifax has implemented two measures. Both aimed at ensuring that BNPL lenders can report these loans to the credit file without affecting consumers' credit scores. Through enabling proper analysis of these loans by lenders and credit scoring companies. Providing consumers a chance at receiving the credit they deserve for on time BNPL loan payments:

  • First, we created a special code that will be applied to all BNPL loans that are reported to the Equifax credit file. This will allow lenders and scoring providers to quickly identify these loans on the consumer’s credit file.

  • Second, we will exclude BNPL trades from the calculation of credit attributes and models at Equifax. As well as some third party generally available models. Which can allow consumers' credit scores not to be affected. Until these loans can be properly analyzed and accounted for in new attributes and scores.

Accurate, detailed, and timely credit reporting is the foundation for consumer lending in the United States. Lenders and consumers can benefit from the ability to see a complete picture. Make accurate and responsible lending decisions. Equifax is ready to help lenders report their loans to the credit file, but are not familiar with traditional credit guidelines. Our team of credit reporting experts will provide guidance and help to make the process as smooth as possible. To learn more read our white paper

*Equifax data