Mon, Mar 20, 2006 - Page 8 News List

Editorial: Keeping scores on credit

The tug of war between the Cabinet and the legislature over whether to impose a lower ceiling on interest rates charged by banks for credit and cash card lending, as well as the lengthy debate on amendments to the Bankruptcy Law (破產法), has left many weary of news about card-debt problems.

However, it's not yet time to move on. Instead, the public should be alert to the fact that the Financial Supervisory Commission and the Joint Credit Information Center are likely to introduce a credit-scoring system that will allow lenders to review a person's financial profile, and issue credit ratings and charge interest rates depending on that person's overall credit score.

Financial regulators are drafting the scoring system in the face of the rising level of defaults on credit and cash card loans. But unlike the overly aggressive measures proposed by lawmakers such as capping interest rates or amending the Bankruptcy Law, this scoring system is not designed to hurt banks' profitability or give rise to more delinquencies. Instead, it aims to help banks manage their unsecured consumer lending more carefully -- an issue that financial regulators have frequently raised since 2004 but which the banking sector did not heed.

While Fitch Ratings has praised the center as the most comprehensive credit bureau in Asia -- with its extensive data on individual debt levels and financial profiles -- banks have neither used the center's data effectively nor conducted credit checks after issuing credit cards to customers. Only when borrowers defaulted on their loans did the banks wake up to the reality that many cardholders hold a multitude of cards and that their debts far exceeded their monthly income.

The question is: Is it important to have credit scores for people who don't even own a credit card or have never applied for a bank loan? The answer is "yes." Everyone should learn responsible credit management.

Here are a few good reasons. First, credit scores are important because they measure how much debt a person is carrying and how well the person keeps up with the bills. In other words, the score is critical to people who are concerned about qualifying for future credit, including auto or mortgage loans. Second, the higher the score, the more creditworthy the person is and the lower the interest rate he or she is likely to get charged on those loans.

While some banks are reportedly developing their own credit scoring systems, each system will basically include the same factors, such as type of credit in use, payment history, amount owed, length of credit history and new credit. To improve the score, people will have to pay their bills on time, keep their balance low in relation to the available credit and refrain from opening new accounts that they don't really need or intend to use, among others.

The introduction of a credit-scoring system and calls for more debtors to participate in the card-debt negotiation mechanism with banks are measures that financial regulators have taken to allow market mechanisms work more effectively. Amendments to the Bankruptcy Law are also important as debtors' rights are involved, but such action needs to be carefully done and requires wider education. Otherwise, it will simply increase the hazards to individual borrowers and expose the banking sector to further risk.

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