How understanding your credit score leads to greater financial inclusion
CREDIT is defined as the ability to obtain goods or services before payment, based on trust that payment will be made in the future. While it helps empower people to buy a house, a car, or start a business, having access to credit also comes with major responsibilities that need to be understood before proceeding, as managing these responsibilities can affect a person’s credit score.
A credit score is a 3-digit number that represents an individual’s ability to manage financial obligations that is calculated based on a credit report, which is a comprehensive summary of a person’s credit history. This includes information on items like account balances, payments maintained and missed, and other elements like employment status. Together, this information serves as the basis for determining a person’s credit score.
Credit scores, along with wider information collated as part of the credit application process, are used by lenders to make informed lending decisions aligned to their risk and underwriting criteria.
In the Philippines, credit scores range from 300 to 850, with 850 being the highest rating. The higher the number, the easier it is for an individual to access various financial services, credit options, and favorable interest rates, as banks and other financial institutions use these scores to assess an applicant’s ability to pay back debt.
Transunion recently conducted global research into the credit behavior of both unserved and underserved consumers. Unserved consumers are people who have never had traditional credit products, while underserved consumers have minimal credit participation usually limited to a single product. Findings from the Philippines show that 51 percent of unserved consumers and 52 percent of underserved consumers expected their credit needs to increase within the next three to five years.
Asked about their plans to apply for credit this year, 39 percent of unserved consumers and 51 percent of underserved consumers in the Philippines expressed their intent to do so. This material proportion of both consumer groups indicates a real interest in credit—which makes credit education an important step towards achieving greater financial inclusion.
As the need for credit access grows, it’s important to debunk certain myths surrounding credit scoring in the Philippines and why they are not true in today’s financial landscape.
Myth #1: You need credit history to have a credit score.
While access to credit does come easier to consumers with an established financial footprint, more opportunities have arisen to bring more unbanked Filipinos into the formal financial system.
A Transunion Consumer Pulse Study conducted from May 26 to June 7, 2022 showed that 54 percent of Filipino consumers believed their credit scores would increase if credit scoring included information not found in a standard credit report. With around 70 percent of unbanked Filipinos in possession of a mobile phone, each device contains an abundance of data which can be analyzed to show creditworthiness, affordability, and behavioral insights.
Transunion solutions utilize alternative data—including publicly available data from mobile phones and devices—such as reloads, payments, and mobile data usage. Based on those alternative purchasing and repayment insights, Transunion can provide credit scores to lenders to help them assess the risk of extending loans, credit, and even insurance products to previously unbanked consumers.
Myth #2: The higher the credit limit, the lower the credit score.
Increasing your credit limit won’t necessarily hurt your credit score. In fact, requesting a credit increase might even improve it.
This depends on your credit utilization ratio—the amount you owe in comparison to your credit limit (and how well you repay the credit you use). The lower the ratio, the better your credit score. Increasing your credit limit lowers your credit utilization ratio. If your spending habits stay the same, your credit score could improve. However, drastic increases in spending coupled with an increased spending limit could risk negatively impacting your credit score.
Things that increase the likelihood of a credit increase request being successful include factors such as getting a raise in income, having a high credit score or a history of regular bills payments. On the other hand, a low credit score can serve as a deterrent for approval. If your credit score needs improvement, consider boosting your credit score before requesting a credit increase.
Myth #3: You can’t improve a bad credit score.
Credit scores aren’t static. They change when the information used to generate a credit report changes. This means that it’s possible for anyone to take control of their financial health and do things that can positively impact their credit score.
Those wanting to improve their credit score need to understand what contributes to calculating it. Factors include your payment history, how much of your credit limit you use, the length of your credit history, types of credit used, and how often you apply for new credit products or open new accounts.
This is where the importance of credit monitoring comes in. Credit monitoring is the process of routinely reviewing your credit score, credit history, and credit reports. Additional findings from the Transunion Consumer Pulse Study show that 95 percent of Filipinos believe in the importance of credit monitoring, with 53 percent monitoring their credit at least once a week.
Through regular credit monitoring, consumers can ensure their credit history is accurate, identify opportunities to improve their credit scores, and prevent falling victim to fraud.
While credit scoring may seem complex, financial institutions must play an important role in educating consumers to understand how credit can work for them. By showing how both unserved and underserved Filipino consumers can build and improve their credit profiles, more consumers can become actively engaged in the credit system—leading to greater financial inclusion for more Filipinos.