What the experts say: the 5 most compelling stats about credit reporting

We’ve just emerged from a cave of reading economic papers to try and understand the impact of credit reporting on business borrowers, lenders, and the overall market.  Here are the top 5 most interesting statistics that were begging to be shared.

Signing up to a credit bureau reduced the average days delinquent by over 12%.

Source: Madrid; Minetti 2013

Our first statistic comes from a 2013 study that provides concrete evidence for the long-understood benefits of credit bureaus. The study analyzed commercial lender data before and after they joined PayNet, taking advantage of the staggered rollout to isolate the effects of credit reporting. The results show that the average number of days a business borrower was delinquent declined from 6.58 to 5.76 - a drop of 12.46%. 

Broad-reaching impact

What makes this statistic particularly compelling is its implications for the broader lending landscape. It offers a pretty clear demonstration of the impact of information sharing in lending markets. A 12% reduction in delinquency days is nothing to sneeze at, especially considering the diverse range of borrower behaviors in a lending portfolio. This shift across the spectrum of borrowers - from those who are never late to those facing severe repayment challenges - underscores how credit reporting can ubiquitously alter borrower behavior.

It also resulted in a 22% reduction in chance of serious delinquency, purely from improved repayment performance.

Source: Madrid; Minetti 2013

The second statistic from this study reveals an equally compelling insight: reporting existing borrowers to the credit bureau can significantly lower the chance of serious delinquency, defined as being over 90 days. The study found that the probability of this kind of delinquency decreased from 7.3% to 5.7% for existing borrowers, a 22% reduction of its original value.

The motivational effect of reporting is proven

This finding in particular excludes the "extensive effect" of allowing lenders to better vet new applicants and focuses on the "intensive effect" of credit reporting - how it influences the behavior of existing borrowers. By looking at the same borrowers who were financed both before and after the lender joined the bureau, the researchers were able to control for changes in the borrower pool and isolate the impact on repayment behavior.

This significant improvement in repayment performance demonstrates the powerful motivating effect of credit reporting. When borrowers know their payment history is being reported to a credit bureau, they have a stronger incentive to prioritize timely repayments. This effect appears to be comparable in magnitude to the benefits lenders gain from improved borrower screening, highlighting that credit reporting enhances lending outcomes through multiple channels.

Questions still unanswered

While the study provides clear evidence of how credit reporting can positively influence borrower behavior, it doesn't specify what (if any) communications were sent to borrowers about the new credit reporting practices. This raises interesting questions about the potential for even greater improvements in repayment behavior if borrowers are explicitly informed about credit reporting practices. 

Thankfully, the last study in our list answers this exact question! More on that later...

Countries that adopted more robust credit reporting systems saw a 40% reduction in non-performant loans.

Source: Ghosh 2019

Our next statistic showcases the profound impact of credit reporting systems on a national scale. A study examining credit reform across multiple countries found that those adopting more robust credit reporting systems experienced a staggering 40% reduction in non-performing loans. This finding comes from an analysis of over 100 banks in 12 countries in the Middle East and North Africa (MENA) region as they implemented significant credit system reforms — namely, the introduction of private credit bureaus.

This statistic is illuminating due to its scale and clarity. By examining entire countries before and after credit reform, the researchers were able to quantify the impact of credit reporting in a way that's often challenging in more established markets. The 40% reduction in non-performing loans is a testament to the power of information sharing in financial markets, demonstrating how improved credit reporting can significantly enhance loan performance and overall economic stability.

What could this mean for US commercial credit markets?

While the U.S. commercial credit system is more developed than the starting points in this study, the findings have important implications for its continued evolution. The commercial credit reporting landscape in the U.S. is still maturing, and lacks the comprehensive regulation seen in personal credit reporting. As such, we might expect the development of commercial credit in the U.S. to follow a similar trajectory, albeit with a different magnitude of change.

Notifying borrowers that their payments will be reported reduced the chance of default from 11.4 to 4.4%.

Source: Liao; Martin; Wang; Wang; Yang (2023)

Our last two stats come from the same study that focuses on the power of borrower credit reporting awareness and its impact on loan performance. One of the most striking findings from this research is that notifying borrowers that their payments will be reported reduced the chance of default by 7 points, from 11.4% to 4.4% — a remarkable 61.4% reduction in default rates!

How the borrowers were informed

This statistic comes from a field experiment conducted with over 4,000 consumer borrowers in China. The researchers took advantage of a unique setting where a large lending conglomerate had some subsidiary lenders that report to credit bureaus and others that do not. This created a useful environment of ambiguity for borrowers regarding whether their loans would be reported. The experiments were carried out with a reporting lender, under the assumption that borrowers were not necessarily aware of the lender's reporting practices at the outset. The researchers then tested different scenarios of informing or "warning" borrowers via text message that their payments would be reported to credit bureaus.

Notifying borrowers has more impact than we thought…

The magnitude of this reduction in default rates from just a notification is particularly astounding. The study provides strong empirical support for the effectiveness of information transparency between borrower and lender. Fun fact: this type of default and delinquency-suppressing effect is exactly why Hansa notifies your borrowers about our reporting practice when we start reporting for you. And in case you were worried notifications might scare potential borrowers away…

Loan signing rate actually increased to 78.2% for prospects who are told the payments will be reported.

Source: Liao; Martin; Wang; Wang; Yang (2023)

The final statistic from the same study on reporting awareness reveals a fascinating insight: when borrowers were informed that their loan payments would be reported to credit bureaus before taking out a loan, the loan acceptance rate actually increased to 78.2%. 

This represents a 4.1 percentage point increase from the control group's loan adoption rate of 74.1% Or to put it another way, the loan rejection rate was effectively reduced from 25.9% to 21.8%.

A potentially unexpected result

This finding comes from a variation of the experiment where researchers warned borrowers about credit reporting before they accepted a loan, but after they had been approved. The results are particularly intriguing because one might expect that the prospect of increased scrutiny would discourage borrowers from proceeding with the loan. Instead, the opposite occurred, suggesting that borrowers actually valued the opportunity to build their credit reputation. In addition, this version of the experiment also maintained the default-repressing effects seen above.

The implication? Reporting loan payments means everybody wins.

The take-aways of this study are significant for our understanding of credit reporting systems and borrower behavior. It indicates that borrowers actually want to be reported to the bureaus, making it a mutually beneficial arrangement for all parties.

For borrowers, the opportunity to have their positive payment behavior reported appears to be an attractive proposition. This aligns with the idea of "reputational collateral" - borrowers see the reporting of their payments as a chance to build a positive credit history that could lead to better credit access and terms in the future. 

For lenders, this increased willingness to take out loans, coupled with the reduced default rates observed in both parts of this study, presents a win-win scenario. It suggests that transparent credit reporting systems can not only improve loan performance but also expand the pool of willing borrowers, potentially leading to growth in lending activities and a corresponding decrease in risk.

These independent expert studies all point to the same thing: credit reporting works.

If all of our reading into economic papers has led us to one thing, it’s this. Time and time again, we see that data transparency between financial institutions and the businesses that borrow from them creates net-benefit effects for all involved. At Hansa, we’re really fond of the phrase “a rising tide raises all ships” and it’s not just because our name is based on a league of Baltic sea merchants. It’s because in the case of business credit reporting, it’s unequivocally true.

That’s why we make it as easy as possible for lenders and other creditors to start reporting.  If you’ve ever found the process of reporting credit payments arduous or expensive, we’d love to hear from you.