In an interview with Executive Director Alex Ilagan of the Credit Card Association of the Philippines, we examine the history and future of the credit history in the Philippines, how delinquency affects your ability to avail credit (whether it be loans or credit cards), and how you can improve on your credit score for easier and faster application in the future.
GoBear: What's in a credit history and what is its role in the banking ecosystem?
Alex: The credit history shows a borrower’s record of borrowings (i.e. when he borrowed money from a lender) in the past. It includes both positive and negative information. Negative information includes all records on poor performance such as payment defaults, adverse court judgments relating to debts, reports on bankruptcy, insolvency, petitions, or orders on the suspension of payments and corporate rehabilitation. Positive information on the other hand includes records on timely payments including the current outstanding balances of one’s debts if there are any.
The credit history is considered very important information in the banking ecosystem because it is indicative of a potential borrower’s credit risk. The credit risk determines a borrower’s propensity to default and is factored into the pricing of a loan, i.e. the higher the risk, the more expensive it becomes for the borrower to get credit.
GoBear: How does credit history affect the ordinary citizen who borrows money or has a credit line?
Alex: In more advanced economies with an efficient credit information system in place like the US, the credit score of an individual determines the type of credit that a person is able to secure, as well as, the price (interest rate) the person has to pay. Individuals with a poor credit history will have difficulty applying for a loan (or credit card) and will either have to put up collateral or pay very high-interest rates.
GoBear: What is the state of credit history in the Philippines right now and has the system of information collection as well as access improved?
Alex: At present, the Philippines does not have an efficient credit information system in place and is vastly inferior compared to the US. The credit history of borrowers in the Philippines at present is very fragmented which makes it more difficult for lenders like banks to accurately assess the creditworthiness of potential borrowers. Individual lenders or groups of lenders (e.g. CCAP, BAP, CMAP, etc) collect and exclusively share credit information among themselves. However, this is often not shared with other parties outside of the group. And in most cases, like in CCAP and CMAP, the information is limited to negative information only so the view is quite limited.
GoBear: How does CCAP plan to play a role in developing or supporting a centralized information system, not just on credit history but also on credit scores?
Alex: Since January 2004 CCAP has been collecting and consolidating negative credit information from all its member banks. This consolidated negative file is then shared with all members for their use in screening and assessing the creditworthiness of new applicants for credit cards.
When RA-9510 (Credit Information System Act) was approved in 2008, CCAP decided to actively participate in the formation of a national centralized credit registry by investing as a private shareholder in the Credit Information Corporation (CIC). This is the government-owned and controlled corporation (GOCC) created by virtue of RA-9510 with the mandate to collect and distribute credit information from all types of lenders in the country. Included in the credit information eco-system created by RA-9510 are Special Accessing Entities (SAE’s) who are actually private credit bureaus whose line of business is the collection and processing of credit information in order to develop credit scores and credit reports for use by various lenders like banks, finance companies, credit cooperatives, and micro-lending institutions.
Since the CIC is still in the process of being set-up for operations which is expected to start early next year, most of the CCAP member banks decided to become a member of TransUnion (TU), a private multinational credit bureau which started operations in the Philippines about two years ago. TU collects credit information from its member banks and develops credit scores and other value-adding services, e.g. default alerts/notification, for its members.
GoBear: Would you have tips on how to begin working on a "good credit score" for a positive credit history?
Alex: To acquire a good credit score, a borrower should ensure all his/her debts are paid on time with no arrears. If he/she owns credit cards, the credit limits should not be maxed-out and the billings are almost always paid in full and always on time, on or before the due date. In case the cardholder is already in default or in delinquent status, he/she should try to settle all his/her obligations as soon as possible in order to avoid his credit card account from being canceled.
Furthermore, the total amount of outstanding debt from all types of loans compared to one’s verifiable income indicates the extent of leverage you are in and therefore, the amount of credit risk you have. The higher the leverage, the lower will be the credit score even if you have no previous record of default.
In summary, always pay your debts on time and try not to over-extend yourself in availing of available credit.