Malta's prosperity is based at least partly upon access to credit. We buy our houses, surely most people's largest single investment, with credit from a bank. Most of us buy cars on credit, under some form of hire purchase agreement with either the car company or a bank. The list goes on.

Credit benefits both the buyer and the seller. Without credit, a buyer would have to save up for every purchase before getting what he needs. With a house, this is not practical: by the time enough cash is put aside, most of a lifetime goes by. And where do you live in the meantime? The ability to borrow the money you need now is there. The cost is then spread over a number of years.

Getting credit allows us to improve our lifestyle relatively painlessly. This is not to say there are no costs. The seller also benefits. Without credit, he would not be able to sell as much. And there is more: if he manages his credit process properly, it can become a source of competitive advantage. He may be able to offer better terms, for example.

Terms and conditions

All the benefits of credit however, depend upon one crucial factor: that there are clear, mutually agreed terms and conditions that are adhered to. This should set out clearly the responsibilities of both buyer and seller. When a buyer fails to honour that agreement, the costs involved in offering credit increase - and that increase is bourne by other buyers, or worse still, the seller stops offering credit terms altogether.

In short, everyone becomes a loser. Yet there is a way out. This is where a credit reference service comes in.

What the seller - and by extension, the buyer - needs is some way of weeding out untrustworthy potential clients from the bulk of reliable debtors. The only problem is how.

First, of course, the seller can and should use his own internal records. If he has been let down by a particular client before, he will be wise to be wary of offering him credit again. But internal records will only take the seller so far. They will not provide a complete picture. What about the client's dealings with other sellers? That is not information available on internal records.

The seller can ask for a bank reference, but even there the record is likely to be incomplete. Other public records can help, but are extremely time consuming to consult thoroughly and the seller can never be sure he has got all the relevant information.

A good credit reference service, like Creditinfo Malta, however, will bring all this information together in one place, properly edited, verified and clearly identified. This information is drawn from Court judgements, from official records at the Companies Registry, and most important default information from a wide range of companies.

Armed with the right data, the seller is in a much better position to assess the creditworthiness of the potential client. This means that the less reliable can be avoided and losses as a result of defaults on the credit minimised.

With careful use of the information in a good credit risk management structure, the seller may even be able to charge a riskier client more. Conversely, he can charge his more reliable clients less and therefore can be more competitive.

Buyer benefits

At a first glance, this seems to mean that the seller gets all the benefits of the improved credit procedures. But that would be wrong. The buyer benefits as well.

Better risk assessment and the ability to distinguish between good, reliable clients and less trustworthy debtors means that the man in the street who honours his or her commitments will find it easier to get the credit he needs, at a better price.

This is a very real benefit. It means that it becomes easier to buy a larger family car when it is needed, rather than having to wait until the whole price has been saved up - by which time the children will have probably grown up.

Because the creditor can gauge the risk he faces more accurately, and can therefore price his credit offer accordingly, even people who have been through difficult times may find they can get credit when they need it, albeit at a higher rate of interest. It may be painful, but if the credit is really needed, it is better than being politely turned down.

Credit reference agencies like Creditinfo Malta add value to both the buyer and seller in a credit transaction, by providing a tool to measure risk more accurately. A potential debtor can have more trust in a company that uses reliable credit information and takes credit management seriously.

For further information, refer to www.creditinfo.com.mt or call Creditinfo Malta on 2131-2344.

Mr Xuereb is managing director of Creditinfo.