Published By Credit Suite at October 17th, 2014
Credit reporting is vital to the credit system. But wait, back up a second.
Rates this high are common in countries where the credit systems are not well developed. So for example, in Brazil the credit interest rates have averaged over 300%. There, certain aspects of credit reporting that are taken for granted in the United States credit system have not historically been allowed. The rules are changing, though. So this is expected to bring the interest rates down some.
The point is, with no credit reporting to speak of, there is only one thing banks and lenders can do to protect themselves. So that is to charge outlandish rates. As credit reporting systems are developed and credit reporting practices take hold, the interest rates eventually come down. So this is because banks and lenders have a better handle on the risk associated with a given borrower.
In the United States, 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, we need data collection, tracking, and reporting practices of a functioning credit system, loans and credit. Because without them, credit would quickly become unbearably expensive.
There is one reason we can get credit cards with reasonable terms. And it is the reason we can get lines of credit, personal loans, business loans, and more. And we can do so without breaking the bank. So it all boils down to the fact that we have a fairly efficient and well-functioning credit reporting system. So it may be imperfect. But it is a lot better than it could be.