Is There A Need For Credit Scoring Systems in Developing Countries?

This mysterious term – credit score – is still not necessarily clear for everyone, epsecially in the developing countries.

But it should be.

Credit scores are critical to fast economic development in poor countires.

Today we wanted to give you a brief idea how credit scoring system works and why we think it is so important.

This article was co-created with credit industry expert, Simon Nowak, CEO of Cafe Credit.

Cafe Credit is an authority in credit and credit scoring.

It provides some basic information about credit scores and at the same time, it gives you some ideas of what you can do to improve your financial situation.

Credit score definition

A credit score is a number, some kind of a “mark” which is based on your credit report. It shows the degree of your creditworthiness and your probable ability to pay off your debts.

How does it work?

Your credit score becomes especially significant when you try to receive a loan. Lenders check your credit score in order to find out how “risky” business partner you are. If they see a low mark they will probably reject your application or give you much worse agreement conditions.

Assuming that the lender grants you the money, you will have to bear the additional costs included in the interest rates or other fees. The insecurity of doing business with you can actually cost you a lot. Clients with higher scores just pay less, which is the main reason why you should take care of your score in advance.

Yet another cause is the fact that not only your potential loan depends on the credit score. It will also have its impact in situations like renting a flat, buying a car, an auto insurance or even a cell phone. You may pay much more just because your credit score is too low. Hence, working on your score really pays off.

What credit score is good?

First of all, it depends on what you need the score for. For a simple credit card, a score of 650 may turn out to be enough. But if you aim at something bigger like a big loan and you want to get the lowest interest rates possible you need to have at least a 720 score. Apart from that, the ranges of number and scoring models are different so it is hard to give the overall answer.

There are a few different credit scores, why?

In fact, you do not have only one score. The credit scores can vary. The three credit bureaus could just use different information about you, because for example, one of them did not have your full credit history while the other had some more information. Moreover, scoring models used by bureaus can also vary which gives different results even if the information used in calculations was the same. Of course, the information about your current situation is being constantly updated and consequently, the score is changing on a regular basis.

Factors impacting your score

As it has been mentioned, scoring models in certain bureaus are different and may focus on various parts of your credit history. But in general, there are the most significant aspects influencing your score:

  • Utilization rate on your credit card – the lower the utilization rate, the better.
  • Payments done on time – focus strongly on this factor as its importance is huge. Remember to pay off any debts on time.
  • Record of your failures – previous bankruptcy, tax lien, civil judgments or foreclosure will definitely decrease your score.
  • The average time of your accounts being open – all your accounts are taken into consideration.
  • The number of your accounts – it is profitable for your credibility when you own a big number of accounts.
  • The frequency of hard credit inquiries – such an inquiry is made when you apply for a credit and an institution checks your credit report. Too many hard inquiries have a bad influence on your credit score.

The information concerning your personal life is not included, it is your financial management which is assessed in the whole process.

How you can improve your score?

Be punctual with your payments, keep the balances low and remember about hard inquiries so avoid applying for credit too fervidly.

Finally, monitor your situation. Check your free credit report (annualcreditreport.com) and vet it carefully. Dispute all errors  you find with major credit bureaus:

Monitor your score movements using services like Credit Karma, Quizzle or Credit Sesame.

Do not become obsessed with your credit score, but remain interested and involved – it will surely pay off soon.