Starting from January 1, 2021, individual credit evaluation will shift from a rating system to a scoring system, marking the end of the familiar "credit rating" system. This change is aimed at addressing the difficulties and disadvantages caused by the existing rating system and introducing a more refined approach to evaluating individuals' creditworthiness.
Here's an overview of the reasons behind the transition and the key changes taking place:
1. Current Credit Rating System:
Under the current system, credit rating agencies assign credit ratings to individuals based on a scale of 1 to 10, with lower numbers indicating better creditworthiness.
2. Reason for Change:
The existing rating system has faced criticism due to challenges in transitioning between grades and the significant impact of minor rating differences on financial opportunities. For instance, even a slight difference in scores could result in difficulties obtaining credit cards or loans. The Financial Services Commission aims to address these issues by introducing a scoring system that allows for more precise assessment of creditworthiness.
3. Details of the New System:
The new system will consider three main indicators:
- Credit Score (1-1000): A higher score indicates better creditworthiness.
- Cumulative Composition Ratio (%): This indicates an individual's rank within the entire population, with lower percentages indicating higher creditworthiness.
- Probability of Long-Term Default (%): This statistical metric estimates the likelihood of long-term defaults for individuals with the same score, with lower percentages indicating better creditworthiness.
4. Changes in Financial Products:
- Credit Card Issuance: Previously, a credit rating of 6 or higher was required for credit card issuance. Under the new system, credit card issuers will use credit scores as criteria for card issuance.
- Medium-Interest Loans: In the case of medium-interest loans, individuals with credit scores below a certain threshold (based on different scoring agencies) will be eligible for preferential terms.
5. Advantages of the Scoring System:
- Individuals will be evaluated on a finer scale, allowing for better differentiation between creditworthiness levels.
- The new system addresses challenges associated with transitioning between grades, making financial products more accessible to a wider range of individuals.
6. Accessing Your Score:
The new credit scores will be accessible through financial apps like Toss. The new scores will incorporate additional data, such as non-financial payment histories and information from the credit industry, leading to more accurate assessments.
7. Impact on Credit Evaluation:
- Previously unaccounted-for information from lending industries will be considered, potentially causing fluctuations in credit scores for individuals who have used financial products from those industries.
- The new system will reduce the influence of financial industry information on credit score calculations while increasing the impact of loan interest rates. This change aims to rectify the phenomenon where credit scores dramatically dropped due to borrowing from second-tier financial institutions.
8. Wider Data Utilization:
Non-financial information, such as utility bill payment histories, will have a greater influence on credit evaluations, potentially benefiting individuals with limited financial transaction history.
In summary, the shift from a credit rating system to a credit scoring system is expected to lead to more refined and accurate assessments of individuals' creditworthiness, making financial products more accessible and fairer for all.