[Practical Finance] Introduction of 'Credit Scoring System' from Next Year... How to Manage My Score?

Up to 3 Free Credit Checks Per Year
Checking Does Not Affect Credit Score
Even Small Delinquencies Are Negative
Delinquency Over 100,000 KRW for 5+ Business Days Lowers Score
Repay Unavoidable Delinquencies Starting from Oldest

Financial and Fintech Companies Develop Alternative Credit Scoring Models
Expect Diverse Services at Appropriate Rates for Beginners and Housewives with Limited Credit History

[Asia Economy Reporter Ki Ha-young]#. Mr. A, whose credit score is 664 points, has a credit rating of grade 7 (600~664 points). Although it is only 1 point away from grade 6, it is not easy for Mr. A to get a loan from regulated financial institutions. This is because grades 7 to 10 generally find it difficult to obtain bank loans. If he had just 1 point higher, he could borrow money stably at a relatively low interest rate, so Mr. A feels frustrated by this 1 point difference.

Starting next year, cases where loans are rejected due to ambiguous differences like Mr. A’s grade are expected to decrease. This is because the 'credit scoring system,' which converts credit ratings into credit scores, will be introduced. Recently, fintech companies as well as financial institutions have been competing to introduce alternative credit evaluation models, which is expected to increase the loan possibilities for thin filers (those with insufficient financial history). As individuals can receive a more detailed diagnosis of their credit status and use financial services accordingly, the importance of credit management is also increasing.

Introduction of 'Credit Scoring System' from January Next Year

The government plans to implement the credit scoring system (1~1000 points) instead of the existing credit rating system (grades 1~10) starting January 1 next year. Since early last year, the credit scoring system has been piloted at five major commercial banks with high credit risk evaluation capabilities (Kookmin, Shinhan, Woori, Hana, NongHyup), and the plan is to expand it to the entire financial sector from next year.

In the credit rating system, grades 1 and 2 are top-tier, grades 3 and 4 are high-tier, grades 5 and 6 are general tier, grades 7 and 8 are caution tier, and grades 9 and 10 are risk tier. Credit bureaus (CBs) quantify credit by evaluating debt levels, repayment history, etc., and then classify these into grades 1 to 10 before providing them to financial companies. Financial companies then reflect the grades received from CBs into their own Customer Credit Scoring System (CSS) to determine the customer's credit rating.

The current credit rating system has a structure where, even if the credit score is at the upper part of a grade (e.g., upper part of grade 7), the creditworthiness is similar to the lower part of the higher grade (e.g., lower part of grade 6), but the borrower may still face disadvantages during loan screening. However, with the transition to the scoring system, the credit rating system, which is currently divided into 10 levels, will be subdivided into 1000 points, enabling more diversified and sophisticated credit screening.

The Financial Services Commission expects that the credit scoring system will allow consumers to receive more segmented interest rate benefits. It is anticipated that flexible loan approvals, loan term extensions, and interest rate decisions will be possible depending on each financial company. Those who were unable to get bank loans due to their grade or who could not get loans even from secondary financial institutions and resorted to private loans are typical beneficiaries. According to an analysis by the Korea Institute of Finance, about 2.4 million people could benefit from an interest rate reduction of about 1 percentage point annually due to the scoring system.

Credit Management Tips: "Build a Repayment Record Without Delinquency"

To improve creditworthiness, it is important to consistently manage your credit status. Checking your credit is the first step. You can access sites operated by CBs such as NICE Credit Information Service and Korea Credit Bureau to check your credit rating up to three times a year, once every four months, free of charge. Checking your credit rating does not affect your credit score. Recently, it is also possible to check for free through fintech companies such as KakaoBank, Toss, and BankSalad.

If you have objections to your credit rating, you can check the basis for the credit rating calculation and receive explanations through the customer center of the credit bureau. If you still have objections after the explanation from the credit bureau, you can file a complaint through the Financial Supervisory Service’s complaint center (Personal Credit Evaluation Grievance Handling Unit).

Above all, to manage credit, it is necessary not to be delinquent even on small amounts. Delinquency information is the most important factor negatively affecting credit ratings. If you are delinquent on an amount of 100,000 KRW or more for more than 5 business days, your credit score or rating will drop. If delinquency is unavoidable, repaying the oldest delinquent account first can minimize the disadvantages caused by delinquency. This is because the longer the delinquency period, the more negatively it affects the credit rating.

Other factors that can positively influence personal credit evaluation include loan repayment history, credit card usage amount and duration, and faithful payment records of telecommunications and public utility bills. Information showing that a borrower has repaid loans diligently without delinquency is evaluated as positive information, indicating the consumer’s ability and willingness to repay debt. Similarly, using credit cards (including check cards) for appropriate amounts and repaying without delinquency can improve credit scores. The longer the period of delinquency-free credit card use, the better the credit score can become.

Also, using check cards rather than credit cards and maintaining a main financial institution rather than frequently changing financial companies is advantageous for credit ratings. Credit ratings are usually calculated based on CB data and then recalculated by each financial company reflecting transaction performance. For university students or young adults with limited financial transaction history, consistently submitting payment records for telecommunications and public utility bills such as mobile phone bills can be a useful way to improve credit ratings.

From Financial Companies to Fintech... Development of Alternative Credit Evaluation Models

Alternative credit evaluation models are actively being developed for thin filers who have difficulty obtaining loans from traditional financial institutions due to insufficient financial history. Approximately 13 million people, including young adults and housewives with limited financial history, can receive loan services by utilizing alternative credit evaluation models. Not only traditional financial institutions but also fintech companies are entering the field to develop related models for evaluating their creditworthiness.

K Bank, an internet-only bank, is currently enhancing its alternative credit evaluation model to apply it to a 'personal business loan product' to be launched in the second half of the year. This is to support small business owners who have no financial transaction history and thus cannot receive proper credit ratings from commercial banks.

Traditional banks are also developing various credit evaluation models by combining big data with financial information. Woori Bank signed a business agreement last October with SK Telecom and 11st to develop innovative financial services and has started building alternative credit evaluation. The goal is to develop a 'low-interest credit loan service' for 11st’s online shopping mall merchants. NH NongHyup Bank introduced the 'All One Emergency Loan' using non-financial information from telecommunications companies last December and launched the 'NH Thin Filer Loan' using its own credit evaluation model developed in April.

The fintech industry is also busy. Naver Financial, a financial subsidiary of Naver, has built its own alternative credit evaluation system (ACSS) by utilizing sales data of sellers on Naver’s open market platform 'Smart Store' and Naver’s machine learning algorithms. Naver Financial expects to provide loans at bank-level interest rates to small business owners without financial history based on ACSS within this year.

Earlier, Fink, a fintech joint venture between Hana Financial Group and SK Telecom, enabled thin filers to receive preferential loan interest rates and limits through its alternative credit evaluation system 'T Score.' Based on the new evaluation method 'T Score,' which uses information such as telecom bill payments, subscription period, roaming, call count, and micro-payment data, it intermediates personalized loan products.