By Kang Seung-woo
A salaried worker, identified by his surname Jin, was recently denied a loan by his local bank due to his credit card history and cash advances.
The bank said that although he did not fail to service loan payments, his low credit rating affected by those financial services prevented him from taking out loans. This sounds a very average case but Jin is only one of many individuals having difficulty in accessing bank loans due to his track record.
“It does not make sense at all because I did not fail to repay previous debts. I wanted to know why I could not take out loans, but the bank did not give me a clear answer, just referring to my low rate,” Jin said.
Local financial firms’ individual credit rating schemes have come under fire for their inconsistent and vague standards. Market experts said that the current system should go under a major overhaul, stressing it should be changed into a more borrower-friendly one.
Currently, there are three credit bureaus in Korea – the National Information & Credit Evaluation (NICE), Korea Information Service (KIS) and Korea Credit Bureau (KCB) – and financial institutions decide each person’s credit rating after combining data from the credit bureaus and their own ones.
But despite using the same data, each institution has come up with a different grade.
“My credit rating from one agency is second class, but another has put me in the fifth class,” said another salaried worker, who declined to identify himself.
“I do not know the criteria on how to evaluate each rate.”
Experts also say that the rating process is not credible.
“There are no distinct standards for evaluation and it is conducted unilaterally by credit bureaus. No one knows how each one’s credit rating is decided,” said Je Youn-kyung, the director at social enterprise Edumoney.
“It is natural that those who use cash more than credit cards should have high records, but actually, it is vice versa, which is incomprehensible.”
Despite growing doubts about the unclear standards, the bureaus have refused to unveil the standards to the customers.
“We don’t make it public because it is our knowhow,” an official of a CB said.
According to the financial authorities, the different ratings are due to gap in amount of information each credit bureau uses in assessment.
As a matter of fact, the NICE and KIS deal with long-term delinquency, loan and guarantee, while the KCB adds credit card records to the credit-rating process.
“Each rating system is different because the agencies are private corporations, which give different estimates. That is triggering grievance among customers,” said Seo Young-kyung, the director of the YMCA Campaign for Credit Society.
Another problem in the grade evaluation is that credit bureaus put a high premium on negative records, such as loans and defaults, rather than interest repayments and large income.
For one credit bureau, default and financial obligations account for 70 percent of the credit rating, but none from individual income.
The KCB recently announced it usually takes 4.3 months to upgrade a rate by one notch, 5.6 months by two, 6.5 months by three and 7.5 months by five.
Although a rate hike needs long-term efforts, a credit freefall can occur even more quickly.
“A few months ago, I inquired about my credit at a capital firm to buy a car on an installment program and several days later, I visited another, but my credit had already fallen,” said a salesman, identified by his last name Park.
“Compared to a rate increase, it drops too easily, even by minor arrears like utility bills. It is very unreasonable,” Je said.
In addition, checking credit through financial institutions drops individuals’ grades and has been at the center of the storm for a long time.
Each rating agency applies an average of 9.6 percent and up to 16 percent of the checked number, meaning that the more credit inquiries, the lower credit rating.
In the worst case scenario, the rate can slide by two notches, said the Financial Supervisory Service (FSS).
Experts suggest that the government should play an important role in hammering out this issue.
“To make the process transparent and credible, public institutions should manage the credit rating,” Je said.
“I think it is not right for privately-owned companies to evaluate individuals. Credible public counterparts have to deal with it with clear standards that enable individuals to know how it works.
“In addition, there should be a system for civil complaints to stop a unilateral grade rating.”
Seo said, “The government needs to make the rating system applied identically at all rating agencies.”
Amid increasing complaints, the FSC has come up with a few solutions.
The financial watchdog plans to create a channel to share information between credit bureaus.
“There is a gap in data between agencies, so each company has different rates,” said an official of the FSS.
“We will try to make them share information to produce a trustworthy mark.”
The FSS announced last month that it will prevent credit bureaus from downgrading individuals who inquire about their credit rating up to three times from next year.
It said that given that currently 85.5 percent of those with loans ask about their rating up to three times, they will be able to avoid this disadvantage, which highly affects the loan rate.
It added that inquiries via the Internet or call centers will not have an influence on the rating regardless of the frequency, but checking through private money lender is still negative to the grading.