Asking someone for a loan can be awkward. You worry, “What will they think of me? How will they judge me?” But it can be uncomfortable to be on the other side as well. Whenever someone asks for money, we can’t help but make personal judgements.
For banks and other financial institutions, however, it is essential that they set aside subjective impressions and base their lending on fair, objective, real-world information. It’s a tricky business. On the one hand, banks want to make as many loans as possible—that’s how they earn their money; on the other hand, they want to be as cautious as possible, since unpaid loans are their biggest financial risk. These are competing interests, and they are usually represented by two different groups within the bank.
Ideally, a financial institution would prefer to rely on a fair and independent source of information. And with credit cards, car loans, and so many other types of borrowing now common in the modern world, it is practically impossible for lenders to evaluate every credit and loan application by themselves with any efficiency.
Consumers also benefit from a good credit information system. It allows more companies and different financial institutions, not just big banks, to offer credit. It creates incentives for people to repay their loans on time, and it reduces the hassle and red tape for those who pay their debts on time to qualify for loans.
Who keeps score?
Various companies, agencies, and organizations provide this service. They are known as credit reference agencies, consumer reporting agencies, or credit bureaus. In some countries they are for-profit corporations, in others they are an arm of the state bank or government.
Egypt’s credit reporting agency is I-Score, which is owned by an association of financial institutions that includes the Central Bank of Egypt (CBE), Egypt’s class A banks, and microfinance institutions.
Credit reporting in brief
A credit reporting agency (CRA) collects data about the borrowing and bill-paying habits of individuals and provides that information to businesses who need to assess people’s credit worthiness. The information helps lenders avoid giving loans to high risk individuals, and it helps set the interest rate, the size of the loan, and other aspects of the loans that they do approve.
Lenders are interested in factors like a person’s borrowing and repayment history, the types of credit they have taken out, and the overall length of their credit history. By providing this information in a standardized way, a credit reporting agency helps lenders assess an applicant rapidly and with confidence.
The credit reports and scores provided by CRAs are also used by other organizations, not just financial institutions. Studies have shown that information about a person’s loan performance is a good predictor of his or her future behavior, so phone companies and other utilities, insurance companies, landlords, employers, and government departments make use of credit records as well.
Sources for credit data
CRAs collect a range of data—personal information, financial data, and payment records—and from a variety of sources. Data is provided primarily by lenders, utilities, and debt collection agencies, as well as from public records, and it includes information such as detailed payment histories, credit limits, and high and low account balances.
In Egypt, I-Score maintains a database of credit information for both consumers and small- and medium-sized enterprises. Its information comes from:
Credit Reports and Credit Scores
The information a CRA collects goes into a database, and from that data it produces individual credit reports and credit scores.
A credit report is the record of an individual’s responsible repayment of debts. It includes his or her loan payment history and the status of all of his or her outstanding debts.
A person’s credit score simplifies his or her credit report to a single number. It is calculated by a statistical analysis of his or her credit history and by comparing it to other similar debtors. The higher the score, the better the credit history and the higher the probability that a loan will be repaid.
I-Score calculates its credit scores for Egyptians using the FICO standard, which is the method used by the vast majority of CRAs around the world. In brief, your credit score takes into account your mix of credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. It is updated three times per week based on credit data reported from I-Score’s members, and it is calculated from five factors.
Payment history(35%), which reflects if amounts due are paid on time, how often payments were late, and by how many days. Newer unpaid or delinquent debt is considered worse than older unpaid debt. Larger unpaid debt is worse than smaller amounts, and many late payments are worse than fewer.
Outstanding debt (30%), which is the total of credit card balances and outstanding amounts on all other loans. A lower total amount of debt is better than higher.
Credit history length(15%), which takes into account how long credit and payment accounts have been established, and how long ago these accounts were last used. In general, the older a person’s credit activity, the more stable it is and the better his or her credit score.
Pursuit of new credit (10%), which reflects the number of recent inquiries for credit information for the individual and the number of new credit accounts or loans that he or she opened in the last year. Too many applications for more credit can suggest that a person is in financial difficulties.
Credit mix (10%), which describes a person’s mix of credit products, such as revolving credit (credit cards, overdrafts, etc.) and installment credit (loans with fixed regular payments, such as mortgages and car loans). Showing good management of different kinds of accounts improves credit scores because it indicates reliability.
How does your credit score affect you?
Your credit report, and more importantly your credit score, is taken into consideration when you request a loan, ask for a line of credit, or apply for a credit card. This information, along with information about your income and assets, will determine whether or not your application is approved.
But your credit score will also determine the interest rate you must pay. Almost all lenders charge higher fees and interest to high-risk customers than to customers with good credit. This lets them continue to offer more loans to a greater range of borrowers while offsetting the risk of defaults.
And because other agencies, from landlords to utility companies, access data from CRAs, your credit score can affect where you live, who will hire you, and more.
Luckily, there are things you can do to manage your credit history and your credit score.
How to maintain a good credit score
The first tip is to pay your bills on time. When there are too many late payments or trouble collecting payments, your credit score suffers. Similarly, when an account is sent to a collection agency, the score decreases even more. Lenders prefer to see debts paid regularly and on time, and they may not consider an overpayment as an offset for an earlier missed payment.
Also, it is better to have a small number of long-standing credit accounts than too many or very recent accounts. A small number of long-standing accounts shows stability and responsibility, while a record of constantly seeking more and more credit makes lenders cautious.
The best way to improve your credit score is to review your credit report at least once a year, and to be pro-active about correcting inaccurate or out-of-date information. The vast majority of disputes filed with CRAs are resolved in favour of the consumer.
You can request your I-Score credit report online at http://www.i-score.com.eg/en/media/downloads/ or from any bank or company where you have a credit account. However, don’t make a habit of it. Remember that too many requests for your credit report can cause a drop in your credit score. A large number of inquiries over a short period of time can indicate the consumer is in a financially difficult situation.
Make a review of your credit record part of your annual financial check-up. Your partners at CIB will be glad to help.