Everything You Need to Know About Credit Rating
One of the greatest perks that working adults enjoy is access to credit. It opens the doors to many important financial decisions made in one’s lifetime.
Before anyone can get a credit card or a loan approved in the Philippines, their credit rating or credit score needs to meet the requirements.
What is a credit score?
A credit score is a statistical number that evaluates a certain consumer’s creditworthiness, or ability to repay a loan with reasonable terms in reasonable time. Lenders in the Philippines use credit score ratings to assess an individual’s probability of repaying their debts based on their credit history.
An individual’s credit score ranges from 300 to 850. The higher a person’s credit score, the more financially trustworthy they appear to be.
How is a person’s credit score determined?
Banks, lenders, and other financial institutions in the Philippines each have their own standards and process for rating credit scores. While they won’t reveal exactly how they compute credit scores, here are some standard credit rating indicators used by the banking industry.
- Payment history
This shows all the payments a consumer makes with a financial institution. It also indicates
whether the individual has been paying on time or not.
- Length of borrowing money
This provides an estimated timeline on how long an individual has been paying for their loan.
- Amount owed
This is a key deciding factor for loan approval, as it determines an individual’s likelihood to pay
back their loans. An amount owed figure shows the balance they still owe to their credit card
company. Consumers who have maxed out their credit cards are most likely to delay their payments compared to those who borrow within reasonable limits.
- New credit
This shows the frequency and number of new accounts created.
- Types of credit used
Banks and lenders check whether you have multiple accounts like a credit card, personal loan, home loan, or business loan.
At present, a centralized credit rating system in the Philippines is gradually being consolidated under the Credit Information Corporation(CIC), which works with two accredited credit bureaus — CIBI Information, Inc. and CRIF Philippines. As of December 2019, the CIC reported having the largest credit database and most diverse set of contributors, with over 9 million unique data subjects and 81,364 companies.
In this period of transition, credit card companies, lenders, and other financial institutions continue using different analytical and calculation tools to determine a person’s credit score.
Importance of a good credit score
Having a good credit score is important as it determines a person’s loan eligibility. If a person has a good credit score, lenders are confident that they will be able to repay a loan according to the terms of the agreement.
In the Philippines, only 25% of the people are financially literate. This means that many Filipinos are conscious of their credit history.
This needs to change. Filipinos should start being aware or conscious of their credit behavior as it will ultimately affect their ability to make future investments. Every time they set major financial goals, like buying a new car or travelling abroad, their credit scores are going to form part of their entire financial history.
Establishing and maintaining a good credit score lets a consumer enjoy the following benefits:
- Low interest rates on loans and credit cards
If a person has a good credit score, they’re most likely to qualify for the best interest rates and pay lower finance charges on loans and credit card balances.
- Improved chance for loan and credit card approval
With a good credit score, individuals can apply for a credit card or loan with confidence.
- Better negotiating power
A good credit score provides people with leverage to negotiate lower interest rates on their loans or credit cards.
- Approval for higher limits
A person’s borrowing capacity is based on their credit score and income. One of the benefits of having a good credit score is that banks will let customers borrow more money once they’ve demonstrated that they can pay back what they borrow on time.
Ways to boost your credit rating in the Philippines
- Pay your bills on time
There may be times that a customer won’t be able to pay their monthly dues on time — whether it’s because of emergencies, financial incapacity, or just forgetting to pay. If one wants to boost their credit score, they should make it a habit to pay their credit balance early, as it makes a good impression. In fact, two payments per month are recommended instead of just one. This habit is viewed as evidence that a person can manage their finances well.
- Avoid applying for multiple loans at a time
If a person applies for several loans at once, this may cause their credit rating to go down. If possible, they should only go through one application; multiple applications and refusals can be damaging to the overall credit score.
- Develop good financial habits early in life
Most people get a credit card as early as possible so that they can start building their credit history. This reassures banks, lenders, and other financial institutions that they’re a good credit risk. Having a good credit history early on also lets them apply for car loans and home loans, which also need to be paid on time.
The future of credit scores and rating in the Philippines
In the Philippines, more and more financial institutions are making the switch to alternative credit scoring through the use of telco data.
FinScore continuously collaborates with financial institutions, lending companies, and credit bureaus to analyze the financial capability of millions of potential borrowers using big data from the mobile activity of their customers.
This makes it possible for more Filipinos, especially in lower-income brackets, to access credit. It also enables companies to grow their customer base further and serve the unbanked segment of the population. While these customers may not have a traditional credit history, they have their mobile phone records to back up their capability to pay.
Alternative credit scoring has become a powerful tool that provides opportunities to institutions in the banking and lending sectors. To learn more about the benefits of alternative credit scoring, contact FinScore today. Our in-house experts will be more than happy to help you.