[1mm Financial Talk] Why Bank Borrowers' Average Credit Scores Are Rising

"Credit Inflation - Causes Including DSR Are Complex"

The average credit score of loans executed by major commercial banks continues its upward rally. The banking sector views this as a result of a combination of factors, including the toughened economic situation, credit inflation, and the Debt Service Ratio (DSR) regulations, rather than an actual increase in the loan approval threshold.

On the 23rd, as domestic market interest rates and bank loan interest rates rapidly rise, a banner displaying loan interest rates is hung on the exterior wall of a commercial bank in Seoul. Photo by Jinhyung Kang aymsdream@

According to the Korea Federation of Banks on the 25th, the average credit score of personal loan customers at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) was 927.6 points (range 907?937) based on Korea Credit Bureau (KCB) data as of March. This marks an increase of 9.2 points compared to 918.8 points (range 895?943) in the same period last year.

This trend is not limited to personal loans. The average credit score of customers with installment mortgage loans rose by 20 points to 935.4. It is now common for credit scores above 900, typically considered a benchmark for high creditworthiness, to be widespread.

Some attribute the rising average credit scores to increased delinquency rates. According to the Financial Supervisory Service, the delinquency rate of domestic banks in February reached 0.51%, the highest in 4 years and 9 months. This has led to interpretations that banks may be raising loan approval thresholds to manage asset quality amid the rising delinquency rates.

However, many in the banking sector argue that the higher average credit scores of borrowers are unlikely to be influenced by delinquency rates. A representative from a commercial bank stated, "Although delinquency rates are rising, they remain very low compared to the 2008 financial crisis or the 2011 savings bank crisis," adding, "At the branch level, there has been no particular tightening of screening or raising of thresholds, so the situation remains unclear."

The industry believes multiple complex factors underlie this rise in credit scores. One primary cause is recent credit inflation. Various fintech (financial technology) services have been launched that allow individuals to check and improve their credit scores, and by incorporating payment histories for telecommunications and utility bills, overall credit scores have been rising. Large-scale government credit amnesties following the COVID-19 pandemic are also considered contributing factors.

Prolonged high interest rates and DSR regulations are also evaluated as influencing the rise in borrowers' credit scores. With the introduction and strengthening of DSR regulations, conditions have been created where borrowers with remaining loan limits or relatively well-managed loans and high credit scores can enter the market. Another commercial bank official commented, "Since the introduction of DSR, credit loans have ceased to be 'loans that everyone can receive,'" adding, "With the prolonged high interest rates increasing interest burdens, it seems that relatively financially comfortable high-credit borrowers are entering the market."