Table of Contents
If a stranger uses my card, it can cause significant damage. Credit card fraud is a situation where valuable assets are at risk. In such cases, it is crucial to report immediately to the card company and take action.
The card company can check transaction history and block suspicious transactions. To minimize damage, it’s important to regularly check accounts and respond immediately if suspicious activity is detected.
Using credit cards safely and managing passwords or personal information thoroughly is essential to prevent unforeseen accidents. This will help avoid unnecessary financial losses.
Recently, I wrote an article titled "Tips to Reduce Damage When a Stranger Uses My Credit Card." In that article, I mentioned credit ratings, and due to requests for more detailed explanations, I will summarize it again.
In Korea, there are two credit evaluation companies that assess individual credit. These institutions analyze consumers' creditworthiness to provide credit ratings, which are important criteria when applying for loans or credit cards. Credit ratings are determined based on an individual's financial transaction history and repayment ability, thus requiring proper management.
In the past, there were two credit evaluation agencies named KIS and NICE. Later, KIS merged with NICE, leading to the emergence of a new credit evaluation agency called KCB, shifting the system to a two-agency structure. These agencies play the role of collecting individual credit information to provide personal credit scores.
A personal credit score quantifies the likelihood that a person maintaining good credit management will experience a long-term delinquency of over 90 days within a year. According to KCB's standards, a credit score above 950 corresponds to a Grade 1 credit rating based on past standards. Those in Grade 1 credit rating, have only a 0.05% chance of experiencing a long-term delinquency exceeding 90 days within a year.
On the other hand, a Grade 2 credit rating with a score between 900 and 949 has a delinquency probability that rises to 0.30%. As credit ratings drop to Grade 3 and then Grade 4, the likelihood of long-term delinquency increases. Such credit evaluation standards serve as crucial indicators in individual financial management and significantly influence people's credit maintenance. Credit evaluations become a vital factor for individuals wanting to facilitate financial transactions.
Financial institutions develop their internal evaluation models by integrating the credit score information received from the two evaluation agencies, NICE and KCB. These models are generally referred to as internal credit scoring systems or CSS (Credit Scoring System).
This system isn't singular; multiple versions operate simultaneously. When a new transaction is desired, the credit scoring system is activated, while action point systems (BSS) are applied when extending existing loans or adjusting credit card limits. Consequently, even if a credit score is good, rejections for loans or non-adjustments in card limits often stem from the results of such internal credit scoring systems.
In the past, credit evaluation agencies used a grading system that assessed individuals from Grade 1 to Grade 10. This system has evolved over time, and now more complex evaluation methods have taken its place.
Financial institutions utilize these credit scoring systems to assess customers' creditworthiness more finely and determine the provision of financial services accordingly. This process serves as a crucial element in building trust between customers and financial institutions.
When credit scores are classified into 10 grades, an issue arises where customers at the border may vary their grades with slight score differences. For example, if one falls under Grade 3, starting from an 850-point credit score, but if my score is 849, I may feel unfairly downgrading to Grade 4 merely for falling short by 1 point.
In response to such complaints, the Financial Supervisory Service has directed financial institutions to base customer evaluations on credit scores. As a result, the current credit scoring system has been established. Under this system, a structure is created where the Financial Supervisory Service implements basic regulations based on credit scores.
For instance, it is stipulated that the issuance of new credit cards is only possible for those with a score of 621 or higher. This method is expected to contribute to building trust between financial institutions and consumers.
Card companies provide cards to customers with a score of 621 or higher, with the limits and conditions of card issuance being determined using internal evaluation models.
Also, the same credit score criteria apply when utilizing mid-interest loans or microfinance, making creditworthiness very significant. This system affects access to financial services and serves as a crucial means of assessing customers' credit status.
Having a Grade 1 credit rating may be something to be proud of, but it's easy to overlook the fact that many people actually hold Grade 1 ratings. As of the end of 2023, there are 13,146,532 Grade 1 credit rating holders in Korea.
This amounts to about 27% of the entire Korean population, and when including Grade 1 to 3, the proportion exceeds 51%. Thus, it is essential to recognize that the percentage of people with good credit is higher than expected. Such statistics remind us once again of the importance of personal credit management.
In Korea, more than half of the population has a credit score of Grade 3, that is, a score of 850 or higher. The reason loan interest rates are determined based on these credit scores is closely linked to the expected loss rates. Loan interest rates are calculated considering not just the cost of borrowed funds but also various direct and indirect costs such as labor costs, fees, expected loss rates, and profit.
Expected loss rates are calculated by considering default rates and the recoverable ratio in case of a default. A lower credit score increases the risk of default, thereby naturally increasing expected loss rates. Therefore, when expected loss rates rise, loan interest rates also rise. Typically, the higher the default ratio, the greater the potential losses that financial institutions may face, and it is common to require higher interest rates to offset this.
There are various suggestions on how to improve credit ratings, but the most reliable method is to follow official procedures. Credit scores are determined by five main factors: repayment history, level of debt, credit transaction period, type of credit, and non-financial sectors. By appropriately managing and improving these factors, one can elevate their credit rating. Increasing credit scores ultimately leads to favorable loan conditions, opening significant financial opportunities for many.
The five evaluation factors are subdivided into specific criteria. Among these, the first factor, repayment history, is evaluated based on past and present delinquency circumstances. If delinquency occurs and maintains, the credit score will drop. However, even if delinquency is resolved, the credit score does not recover immediately. Therefore, repayment history plays a critical role in credit evaluation, making it essential to minimize delinquencies.
Details regarding credit scores need to be examined carefully. Firstly, positive factors for specific items contribute to raising scores, while negative factors decrease scores. Here, having two plus signs can significantly raise scores, while two minus signs can substantially lower them.
In cases of delinquency, credit scores may drop significantly, but resolving them can restore scores to some degree. However, it is worth noting that delinquencies within 4 days or for amounts less than 100,000 won are not regarded as delinquencies. This is due to the potential for short-term delinquencies or small amounts to occur from mistakes or errors.
There is no need to excessively criticize the card company for calling about a delinquency of just one day. However, if a delinquency exceeds five days, credit scores can drop significantly, leading to various problems, serving as a mechanism to protect those who make accidental delinquencies.
When loans are obtained using credit type information, it can be confirmed that the credit score tends to fall, and there can be significant score differences depending on the lender. Utilizing relatively low-risk loans such as bank loans may result in a slight score drop, but obtaining loans from high-risk lenders like savings banks can lead to significant drops in scores.
Lastly, it has been confirmed that using debit cards positively affects credit scores. This means that the continuous use of debit cards affects the score. To manage credit scores effectively, it's crucial to understand and utilize these various factors.
The credit transaction period refers to the time of transactions after obtaining a loan or opening a card. This transaction period positively influences the credit score. For instance, if one uses a loan or card and repays diligently without delinquency, the length of the credit transaction period can increase, yielding additional points. Therefore, it is essential to remember the importance of the credit transaction period.
Increasing the balance on a credit card has a negative effect on the credit score. This becomes more serious as the total amount of usage and revolving balances increases. Credit evaluation agencies consider an increase in card balance as usage of revolving services, which leads to a drop in credit ratings.
Moreover, utilizing short-term loans such as cash services also significantly negatively impacts credit scores. The tendency for credit ratings to drop increases the more revolving services and cash services are used. Therefore, caution in credit card usage is necessary.
Consistently using a credit card well without delinquencies can improve credit scores. Particularly, if one does not use card loans or cash services, the benefits could be even more positive.
But if a delinquency occurs for over 90 days, the situation changes. Even if the delinquent amount is settled, the credit score does not rise immediately, and delinquent records can negatively impact the score for up to five years. Therefore, diligent credit management is essential.
We cannot overlook the existence of individuals who face difficulties with credit evaluation agencies. These individuals often do not borrow and find it very difficult to confirm their credit information. They are generally referred to as 'Thin Files', meaning they have little credit history or thin credit files.
For individuals classified as Thin Files, standard credit evaluation methods may not be applicable. Credit evaluation agencies make attempts to evaluate them using other tailored information through new models, but acknowledging high credit scores for individuals with undisclosed identities is no easy feat. Consequently, these individuals typically find it challenging to obtain satisfactory credit scores.
Recently, new assessment methods for Thin Files are being explored by utilizing unstructured data, or alternative data. For instance, young individuals just starting their careers or those in their early twenties often lack financial transactions leading to a Thin File classification. Hence, it is advisable for these youths to initiate basic financial transactions, such as using debit cards.
Even small transactions can enhance credit scores, and this accumulated information can have a positive impact at critical moments. Thus, keeping records of minor transactions to improve credit scores can ultimately contribute to increased reliability. This emphasizes how important it is to build credit through financial transactions.
Credit scores inherently possess some limitations. They primarily reflect information related to repayment willingness, meaning personal credit signifies their commitment to repay debts. However, this may differ from an individual's actual capability. For instance, even if the owner of a high-rated restaurant has excellent credit, if the food is poor or if they lack business acumen, that establishment is likely to face difficulties.
Repayment ability is usually assessed through an individual's income, assets, and debt situation. Such factors help to comprehensively evaluate a person's financial situation, but solely relying on credit scores limits the ability to judge overall capability. Therefore, credit scores and capabilities should be understood as distinct concepts, necessitating consideration of this distinction.
DTI, DSR, LTV, and income verification are methods to evaluate the repayment ability by assessing an individual's income, debt scale, and asset capacity. These indicators play a crucial role in analyzing borrowers for financial institutions, and their accuracy varies depending on the circumstances. For instance, while credit scores are indicators of repayment willingness with high accuracy typically, during economic downturns, metrics such as DSR and LTV show higher accuracy rates.
To prepare for economic recessions, financial institutions aim to reduce lending ratios and reinforce DSR in order to heighten the importance of repayment ability. Thus, proactive measures are taken for groups deemed high risk, such as multi-borrowers or low-credit self-employed individuals. These measures can be understood as ways to maintain the stability of the financial system.
Concerning credit ratings, there are two specialized agencies, NICE and KCB, but discussions may arise about which is more accurate. Given my past experience as an external member for both credit information companies, I possess some insights into their evaluation criteria and reliability. Notably, various factors significantly influence individual financial status and borrowing potential.
One side had a traditional cultural background, while the other had relatively modern cultural elements. After the meeting ended, the traditional side offered expensive gifts as a token of appreciation, while the modern side opted for a brief presentation time to share information.
In terms of gifts, it seems that they were unaware of the complexities involved, such as needing to report and submit to the compliance department after receiving them. Thus, these differing cultural approaches manifested differently depending on the atmosphere and purpose of the meeting.
With subtle cultural differences, we can recognize various business approaches or qualitative differences in credit ratings. When evaluating businesses, these minor factors often have a significant impact on the evaluation's outcome, showing significantly high accuracy in reality.
Managing credit scores is particularly important, as good management can serve useful assistance at crucial moments. For instance, it is advisable to avoid high-interest loan products such as cash services or card loans, and while using cash is acceptable, utilizing debit cards to maintain transaction records positively influences credit score management.
Additionally, it is crucial to be cautious when using cards. Since the card limit and usage rate significantly affect credit scores, it is advisable to promptly reduce limits for cards not in use. It is important to remember that merely cutting back on expenditures might negatively impact credit scores by decreasing card limits. Therefore, systematic management of credit scores considering such aspects is necessary.
