The purpose of a credit rating system is to investigate and analyze factors that impact consumers’ credit status and make a decision on the supply of credit services. Finance is often said to be the blood vessels of an economy, and credit rating systems perform a vital role in deciding the flow and direction of money within the vessels. The World Bank acknowledges credit rating systems as crucial to financial infrastructure and believes that credit rating systems play a critical role in stable economic growth.
Many countries around the world recognize how important credit rating systems are in economic growth and make efforts to improve their accuracy. The U.S. financial regulator made an agreement with three large credit bureaus in March 2015 and successfully improved the accuracy of credit reports, eliminating repayment records of unreasonable medical debts from credit reports. In China, around 1 billion people have never interacted with financial institutions, which leave them out of the boundary of credit ratings. Therefore, the Chinese financial regulator is struggling to work out a way to effectively and efficiently evaluate credit scores for those people.
In the same vein, the Financial Supervisory Service has consistently made improvements to its credit rating system. In 2013, the FSS established an exclusive team for handling financial consumers’ complaints and objections regarding credit rating evaluation results. Since then, the team has been operating to protect the rights and interests of people.
Since last September, the FSS has particularly focused on its efforts to fundamentally improve practices related to credit ratings. Through this, the FSS came to be able to lead credit bureaus to collect valid information and reform unreasonable parts of the credit rating system. Indeed, credit bureaus in this country are more often using negative information regarding financial transactions to calculate credit ratings than their counterparts in advanced countries. This is likely to undermine the accuracy of evaluation models. Therefore, the FSS carried out improvements in the credit rating system.
The FSS has promoted some major improvements since last year.
First, the FSS decided to reflect the payment record of public utility fees, health insurance, and similar bills on credit ratings. In the existing system, credit ratings had been based on negative information alone. This hinders the accurate calculation of a credit score and makes it difficult for those who have little in the way of a financial transaction record to freely transact with financial companies. In case nonfinancial data is applied to credit ratings, credit ratings for nondelinquent taxpayers can be conducted in a more accurate way, and it is expected that around 10 million consumers whose credit information is not sufficient will be able to have better access to the financial industry.
Second, when credit bureaus calculate credit ratings for microcredit program users, they have given extra points to those who use the Smile Microcredit Bank and repay their loans in a timely manner. This has raised questions over fairness. The FSS recently improved the existing method in order to grant extra points to users of other microcredit programs ― the New Hope loan or Sunshine loan ― under the same conditions. Thanks to this, around 140,000 financial consumers are expected to benefit in credit ratings.
Third, the FSS removed cash advance limits on credit cards from among the evaluation items for credit ratings. In the case of credit card holders who adjust the cash advance limit on credit cards to their spending levels or use a single credit card intensively, they are prone to experience disadvantages in credit ratings. Therefore, the reformative action of the FSS is expected to prevent those people from facing unfavorable situations. Furthermore, to keep credit rating calculation for bad debtors tight, the FSS also elaborated on relevant evaluation models.
Zhuangzi, an ancient Chinese text, includes the tale of Cook Ding. The story says that a good cook finishes cooking without ruining his knife and ingredients thanks to the greatness in wielding the knife. The FSS will carefully and prudently make improvements as well as protect the autonomy and creativity of the commercial bank market in order for credit bureaus to increase the accuracy of their credit rating system.
For this, the FSS will make concerted efforts with credit bureaus and companies holding nonfinancial data to apply positive information and nonfinancial data to the credit rating calculation. At the same time, the FSS will review whether the credit rating system is operated in an appropriate way without infringing on the autonomy of market.
The FSS expects that its policies for reform will contribute in developing the financial infrastructure and help Korea’s financial industry to further grow.
By Kim Yoo-miThe writer is the senior director general of the IT & Financial Information Protection department at the Financial Supervisory Service. She can be reached at firstname.lastname@example.org. The views reflected in the article are her own. ― Ed.