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How Credit Reporting Helps the Credit System

Credit Suite - Friday, October 17, 2014

Did you know that credit card interest rates in some countries are over 200%?

Rates this high are common in countries where the credit systems are not well developed. For example, in Brazil where the credit interest rates have averaged over 300%, certain aspects of credit reporting that are taken for granted in the U.S. credit system have not historically been allowed. The rules are changing, though, which is expected to bring the interest rates down some.

The point is, with no credit reporting to speak of, the only thing banks and lenders can do to protect themselves is to charge outlandish rates. As credit reporting systems are developed and credit reporting practices take hold, the interest rates eventually come down because banks and lenders have a better handle on the RISK associated with a given borrower.

In the U.S., the credit system is far from perfect. Privacy and consumer protection concerns often lead people to believe that the system as a whole is a problem. The reality is, without the data collection, tracking, and reporting practices of a functioning credit system, loans and credit would quickly become unbearably expensive.

The reason we can get credit cards with reasonable terms–the reason we can get lines of credit, personal loans, business loans, and more–without breaking the bank, boils down to the fact that we have a fairly efficient and well-functioning credit reporting system.


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