Information Asymmetry & Its Impact On Credit Rating

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A recent study on the credit market suggests that information imbalance impacts the consumer credit rating in an acute manner and can be a key reason for borrower delinquencies. With better understanding of the credit rating model, this can be fixed.

A backward approach involves studying the FICO scoring model for credit rating. There are five factors involved including:

·  Payment History (35%)

·  Amounts Owed (30%)

·  Length of History (15%)

·  Mix of Credit (10%)

·  Inquiries (10%)

This model helps in understanding how to prioritize the credit repair model. The ‘mix of credit’ is important in the sense that it deals with the type of credit consumers have. This has an umbrella effect on other factors. For instance, in the mix of credit, consumers can have options such as an installment account, a revolving account or a mortgage.

credit rating

A publication on credit repair highlights that certain apparently harmless financial activities can negatively impact the credit rating. A good example of this case is of co-signing or guaranteeing a loan for an individual. It means that the person co-signing would be labeled as the primary borrower. If the other person doesn’t pay, this act can impact the co-signer’s credit in a negative manner.

Another factor aiding the information asymmetry is that some creditors may only report information to some bureaus. The disparity of information exchange can lead to changes in scores.

Remedial Measures

Working towards a solution is dependent on the proactive nature of the consumer. Financial literacy plays a major role in this regard. A large segment of the population is not financially literate, which indicates a need for professional resources to deal with negative credit rating issues.

Customer testimonials about credit repair companies suggest that professional services can provide remedies for credit rating problems. This also frees up some time for the customer, which is important because once a consumer is embroiled in negative credit, they need time to evaluate options and study statues from the IRS. To make the situation paradoxical, the more time the credit rating remains low, the more problematic it becomes. Repair services can quicken the process, especially if there are errors found in the client’s credit history.

Consumers should also educate themselves on legal provisions with regards to credit rating. Instead of bearing the brunt of information asymmetry and suffering as a result, consumers can use the Fair Credit Reporting Act (FCRA). The FCRA has numerous clauses, one of which allows them to seek damages from violators. Such incentives can only be provided if the consumer is aware of the scope of the act and how they can use it to improve their credit rating.

Research work conducted at the University of Wisconsin has indicated that financial literacy has a strong correlation with credit management. It also adds that people who have more knowledge about credit rating systems tend to make use of repair or counseling services. The study is comprehensive since it evaluates more than 40 educational and counseling programs.

There are numerous run of the mill tips available when it comes to issues such as credit repair. However, information asymmetry is a key deterrent to a good credit rating, so with improved consumer knowledge of this, better choices can be made.

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