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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.

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