The benefits of a scoring system

The financial system needs a credit scoring system for better transparency and planning

Photo of Marwan Lutfi, the chief executive of Al Etihad Credit bureau. Lee Hoagland / The National

The launch of a credit scoring system is a sign of a changing and, hopefully, maturing personal finance landscape. As The National reported yesterday, Al Etihad Credit Bureau’s new credit scoring rating is calculated using attributes such as nationality, age, outstanding balances, payment history and the number of loans taken in the past. By introducing a credit scoring system, the country is taking an important step towards developing a more sensible and responsible approach to lending and risk.

Certainly, some consumers will benefit from the system, especially people with good payment histories, as they are more likely to receive more favourable rates when applying for a loan.

Having access to your credit score promotes a culture of transparency and accountability that should empower individuals by helping them to understand why banks make certain decisions about their lending limits.

On the other hand, it will affect both banks and individuals with poor credit histories because it could mean the end of high credit card limits being issued to all and sundry.

Individuals with poor credit histories will be forced to rethink their financial planning and look for ways to spend wisely. Banks will also no longer be able to entice customers with credit card and lending limits far beyond the means of the borrower. The credit scoring system also effectively forces lenders to act responsibly as they will be fully aware of the risk profile of a borrower long before extending that person a loan or credit facility. No longer can those lenders simply blame the consumer for finding themselves in unworkable levels of indebtedness.

We do, however, hope that consumers will be able to challenge their rating. Data-mining can be an inexact science and can throw up falsehoods and misinformation. If a consumer is attributed a low score and feels this is an unfair reflection of their creditworthiness, it is only right they should have the ability to question how that calculation was made and, if appropriate, for it to be reviewed and changed.