« Fringe Banking and Financial Distress | Main | Reflections on Credit CARD Act Day »

Credit Reporting in Fringe Credit Markets

posted by Jim Hawkins

Credit histories are an important part of what separates mainstream credit from fringe credit.  One reason I believe that fringe banking is unlikely to cause financial distress is that fringe credit firms do not use credit histories to evaluate the likelihood a borrower will repay a loan.  Instead, they assume the risk of nonpayment is high, so they structure the transactions to guarantee repayment through other means like collateral.  Or, they limit the likelihood of default by only loaning small amounts.  Credit cards, on the other hand, rely on credit histories and offer high credit limits without any collateral--the recipe for a product causing distress.  Ironically, the better credit you have, the higher likelihood you will take on a credit product that could cause financial distress.

Richard Brooks has argued that people using fringe banking do not get "credit" for positive histories with fringe lenders because fringe lenders do not report this activity to credit bureaus.   

But, maybe both these observations are about to change.

Teletrack, the credit bureau for fringe banking firms, has associated with Transunion, a mainstream credit bureau.    This association will allow fringe lenders to access more credit information than they used to, which could lead to higher loans that are uncollateralized.  Additionally, fringe lenders should be able to easily report fringe borrowers' activities now. 

I think in part this change reflects a trend in fringe banking towards diversification.  The fact some rent-to-own stores now offer payday loans illustrates this trend.  For me, I tentatively think diversification is a positive change because it can lead people using fringe products to pick the best fringe product for them.  Or, if they have access to lower rates because of their credit histories, the association between Teletrack and Transunion could open this possibility for them whereas before they may take out a payday loan with a higher rate.


The comments to this entry are closed.


Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.



  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.