Sources of Credit Reports/Purpose of a Credit Report

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Globe for WikiEducator.jpg Unit 3.1- Sources of Credit Reports 

Introduction | Components | Purpose | Direct Sources | Other Sources | Indirect Sources | Summary | Resources | Activities | Assessment

The Purpose of a Credit Report

The credit report has become an important economic tool in the process of a credit investigation and subsequent analysis. Without this instrument, many sellers would not be in a position to evaluate the ability of a company to pay in accordance with the contracted terms.

Without a credit report, sellers would either sell on a type of secured transaction (usually requiring a letter of credit, or prepayment, including wiring funds in advance of the sale of the goods or services to the buyer versus allowing the buyer 30 to 60 days or longer to pay. Many people believe the economic growth of any country is dependent on the ability of businesses to buy goods or services on a basis of “pay later.” Without the availability of credit reports, sellers should be concerned if they will be paid and when they will be paid.

There is an old maxim: “The sale is not complete until it is paid for.” Without credit reports, a seller could record revenue (sales), but unless there is a tool to evaluate a buyer’s history and ability to pay at a future time, the recorded sale could become a bad debt for the buyer without the sale ever actually being realized.

The ability to provide credit to buyers plays an integral part in the world economy. If business on a worldwide scale was on a cash-and-carry basis, business as we know it would not exist. Those sellers who wanted to “grow their businesses” recognized early in history that a “promise to pay” was one way to allow buyers to take more goods or services than immediate cash might permit, re-employ the goods or services in their own business, generate funds, make a profit, and pay the seller according to agreed upon payment terms. ("Improving Credit Practice,” Miller and Relkin, AMA, 1991.)