GIVING IT WHERE IT IS DUE: CREDIT SCORE IN THE PHILIPPINES
CIBI Information, Inc. | 10 October 2016
For a country with a budding consumer lending system like the Philippines, the idea of creditworthiness is as alien to many Filipinos as music is to the hearing impaired.
The numbers spell out just how financially immature the average Pinoy is. According to the National Baseline Survey on Financial Inclusion conducted by the Bangko Sentral ng Pilipinas (BSP) in the first quarter of 2015, only four out of 10 Filipinos are able save money. Of those who have savings, 32.7% deposit their money in banks, while 68.3% keep them at home. This is a rather small improvement from 2012 when the same BSP survey showed that 20% of Filipinos have a bank account.
Statistics from the credit sector also tell the same tale. Majority of Filipinos would rather borrow money from the informal sector like friends or family members (61.9%) or informal lenders (10.1%). Consequently, formal lending institutions get the smaller chunk of the loan market with banks turning out to be the least preferred money-lending option by Filipinos (4.4%). With the country’s promising economic growth pattern for the past few years, financial experts found that this credit-wary attitude of Filipinos has created a vacuum in the sector.
Before, it would’ve been deemed too much information for the general public to know about the intricacies of the credit system. But today, educating ordinary people about debt may prove beneficial in stimulating the dormant credit information ecosystem in the Philippines.
For the common Juan, understanding the “system” starts with the credit score. Much like how a person wants to know if he can trust someone before he lends the person some money, the credit score is a means by which lending institutions determine the amount of risk involved in granting a loan and reduce the likelihood of “bad” or unpaid debts.
A credit score is a numerical expression reflecting an individual’s creditworthiness generated by accredited accessing entities -- known as credit bureaus -- by analyzing an individual’s credit information. They usually range from 300-580, with higher values indicating more positive credit health. Computing the credit score involves assigning values to a person’s payment history, amounts currently owed, the length of credit history, accounts recently opened, types of credits in use, and number of hard inquiries on a person’s credit health. The algorithm and the weight given to each factor may vary from one credit bureau to another but the ratings will still create more or less the same impression of a borrower’s ability to pay out his debt.
So what does the regular consumer get from having a stellar credit score? Two words: better financing.
Creditors take the adage “time is money” literally because they literally lose money when payments are delayed which is why they value diligent payers. Their valued clients are offered more flexible financing schemes, lesser interest rates, and are waived of extra fees. It’s also easier for them to get approved for bigger purchases like house or car loans.
But the thing with credit scores is that it’s much more difficult to build it up than to ruin it. Just one major red flag and it will stay reflected on your credit score for years, so one can’t be too confident about his credit score.
The Philippine government has made a decisive move to finally pave the way for a centralized consumer credit standard. In a few more years, something as alien as creditworthiness would be part of our daily concerns. Which brings us to a conclusion: from now on, it pays to pay on time, but it also pays to know why you should.
Last May 2016, there are 4 credit bureaus that were accredited by Credit Information Corporation as Special Accessing Entity for credit information. These bureaus will help support the credit information exchange in the country and will help transform the financial data into analytics.
Soon every Juan will be choosing the credit bureau that will support his/her growth as an individual or as an entrepreneur. It is best to be with a credit bureau who knows every Juan dela Cruz better as our financial set up is very challenging and unique among other countries.
This is a positive move for us and may this embark the change that we long deserve.