Private Credit Bureaus and Positive Information Sharing: Effects on credit cost?

This study exploits a legal change in Brazil to identify the extent to which new information generated by credit bureaus translates into different loan interest rates. The legal change enabled private credit bureaus (PCBs) to build new credit scores for approximately 100 million individuals, based on a broader scope of positive information, such as loan flow and repayment patterns. We find an average reduction of 3.7% in the interest rates of personal loans to borrowers whose new scores became available for sale by the PCBs. The effects are stronger in the cases where the new score is much higher than the old score, reaching an average reduction of 8.7%. We find stronger results for new clients and for private banks. The mechanisms behind our results include both the reassessment of borrower credit risk and higher competition among lenders coming from the dissemination of new positive information. We also provide empirical evidence consistent with information sharing reducing the ability of lenders to informationally lock-in their borrowers.