One of the reasons that the FICO® Scores are so powerful a risk predictor in the U.S. is that the underlying credit bureau data includes a wealth of both positive and negative bureau data. Now one large credit market that previously had only negative credit bureau data — Brazil — is poised to make a change. On May 19, the Brazilian Congress approved a temporary bill to create a positive bureau, which now just needs presidential approval. If passed, Brazil will join most countries in the G20 and the BRICs in allowing banks to share positive data on consumer credit performance.
Positive data benefits people with a good credit history, and makes risk scores built on bureau data much more predictive. This means lenders can make loans with greater confidence, because they can do a better job of assessing the risk of borrowers.
There will also be benefits in the cost of money, since the cost of credit losses accounts for an estimated 32% of the banking spread — the difference between the interest rate that financial institutions pay for money and the rate they charge consumers. Lower the losses by making better credit decisions and you lower the spread, meaning interest rates for consumers should go down.
The adoption of the positive bureau has another immediate advantage. It will allow lenders to make decisions on a better understanding of a consumer’s level of indebtedness. This is critical to assessing a borrower’s credit capacity, and their debt-to-income ratio. According to Brazilian Central Bank, the debt ratio of the population in relation to income is 39%, but it’s difficult if not impossible today to measure whether any individual is higher or lower than the average.
Banks won’t be the only beneficiaries. Retailers, who finance much of the low-income and new-to-credit population, will be able to help consumers get their hands on refrigerators and other higher-ticket purchases. However you look at it, more positive data makes a more positive credit environment for businesses and borrowers.