adminA modern financial system is based on credit and not cash. This means it has to have a properly developed credit assessment system and proven models which serves to assist the credit providers and credit users on how much of which credit to give and take. In short, the quality and quantity of credit in the economy should be governed through a credit system that is based on some acceptable and proven standard.
Zimbabwe is lagging behind and it is in urgent need of proper credit assessment system.
A normal credit report has a “credit score” known as a Fico score. A Fico score is a type of credit score that makes up a substantial portion of the credit report that lenders use to assess an applicant’s credit risk and whether to extend a loan.
Fico is an acronym for the Fair Isaac Corporation, the pioneers and creators of the Fico score.
A person’s Fico score will range between 300 and 850. In general, a Fico score above 650 indicates that the individual has a very good credit history.
People with scores below 620 will often find it substantially more difficult to obtain financing at a favourable rate.
In recent times there is a growing trend for banks and creditors to use custom attributes in conjunction with these credit scores.
This means that creditworthiness is much more than just your credit score so you need to know what factors to consider in what makes up your credit score.
Leading investment database Investopedia explains “Fico Score” as “Using mathematical models, the Fico score takes into account various factors in each of these five areas to determine credit risk: payment history, current level of indebtedness, types of credit used and length of credit history, and new credit”.
In North America many lenders are starting to use new score models, like Vantage- Score, which is a model collaborated on by all three credit bureaus.
In addition, most sophisticated lenders are using custom models which use more than a simple credit score for risk assessment.
Consumer Financial Protection Bureau [CFPD] carried out a research on various credit models and scoring.
The CFPB’s research found that different score models place consumers in the same credit range 73 to 80 percent of the time.
That means there is a high correlation among different credit score models.
As an emerging market Zimbabwe needs to have a credit reporting model in line with international standards.
The system will be based on the international credit rating standard Fico which will be slightly modified to suit the local market.
The overall score determined by the system will range from 0 to 1 000, the higher the score the better.
The system does not serve to approve credit applications but, however, is designed to provide accurate and efficient information to service providers when issuing credit or a loan.
These percentages are based on the importance of the five categories for the general population.
For particular groups — for example, people who have not been using credit for long — the relative importance of these categories may be different.
NB: The use of the factors used above will vary overall based on the length an individual has held a credit record for example a person applying for credit for the first time will not have payment history.
The system will consist a database to store historical information, personal information and service provider submitted information.
Based on a series of algorithms the system will determine the credit score and the report will be submitted to a service provider upon request.
The Fico score is the most common credit score used by creditors/lenders in order to evaluate a borrower’s creditworthiness and is developed by Fair Isaac Corporation.
However, scores offered by each credit reporting agency (CRA) or credit bureau may vary because not all creditors report information to every CRA.
Moreover, the credit scoring models used by the bureaus differ slightly from one another.
In general, there are five factors which affect your credit score calculation.
The factors with their weightage of importance are given below:
Payment history (35 percent)
This includes information on – How you’ve paid credit cards, instalment loans, mortgages, etc. Adverse public records such as bankruptcy, liens and collections.
How many and how long past due accounts and adverse public records have been on the report. Accounts paid as agreed.
Amount you owe (30 percent)
This provides details on – Number and type of accounts you owe. Ratio of balance to total credit limit (revolving accounts). Ratio of balance to original loan amount (instalment loans).
Length of credit history (15 percent)
This includes the time period since you’ve opened different types of accounts.
New credit (10 percent)
This provides details on – The accounts you’ve recently opened. Number of recent credit inquiries. Time since recent credit inquiries.
Time since accounts opened recently. How you’ve rebuilt credit after past credit problems.
Credit/loan types used (10 percent)
This factor includes the different types of credit/loans you’ve opted for.
Disclaimer:
At GMRI Capital, we pride ourselves on the quality and depth of our research and analysis. This means digging deeper than our competition for information and generating more useful reports.
This article is provided “as is” for informational purposes only, not intended for trading purposes or advice. Prior to execution of any security trade, you are advised to consult your authorised financial advisor to verify the accuracy of all information. Neither GMRI Capital nor any independent provider is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.
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