Credit history is very important in real estate investing since usually, the cost of a good property is very significant, and it is almost always the case that the buyer takes out a loan to complete the purchase. Imagine if this is not possible because of a bad credit history / credit score.
Unlike in the United States and other countries, the Philippines has no centralized database of credit history and credit scores, the information from which may enable banks and other financial institutions to adjust interest rates based on a borrower’s credit history.
Without such centralized database, it is believed that banks and financial institutions generally apply a high interest rate to those with both bad and good credit history (since they effectively cannot separate the good from the bad apples) to cover for those who will default on their loans.
Take note, however, that the Philippines will be having its own credit database very soon and we should all watch out for it.
R.A. 9510 and its IRR
R.A. 9510 [An Act Establishing the Credit Information System, and for other purposes] was approved on October 31, 2008, and its related Implementing Rules and Regulations were approved on May 27, 2009. The Credit Information Corporation (CIC) was formed to enforce R.A. 9510. It is headed by Jaime Garchitorena [Yes, of "Just A Smile Away” fame. Bwahaha I feel so old.]
Building of a Philippine Credit History Database
I was able to watch a video of him before being interviewed at ANC On The Money and based on that interview, I thought that the Philippine Credit Bureau was a really good idea. Here’s an excerpt of a press release which I recently saw in the CIC website:
CIC President and CEO Jaime P. Garchitorena announced that the data system would be ready to accept credit information starting June 15, 2015, and that the next six to 18 months would be devoted to building the database and increasing its usability. “We hope that in 24 months we will be able to say that everyone will be able to get the credit they deserve from their credit history,” he quipped.
It seems that we should all be conscious of our credit histories and expect that a national credit history database will be complete by June 15, 2017, and this will be the basis for our credit scores. This timeline is supported by the publication of CIC Circular No. 2015-01 and its submission to the UP Law Center Office of the National Administrative Register (ONAR) last June 5, 2015. I believe the said circular took effect last June 20, 2015 (15 days after).
In a Philstar article, I learned that more than thirty (3o) institutions are already enrolled in the database, while a lot more are undergoing data format revisions and reviews. CIC, in a press release, shared that training sessions have already been held for technical personnel of top financial institutions in preparation for the population of the CIC database. So this initiative is really gaining ground.
The CIC is also embarking on an information drive so that people will be aware and be more conscious of their credit behavior. Here are some videos which you can watch so you can learn more about CIC and its mandate.
Some important points from the above videos:
- Know how to manage your money. Spend less than what you’re earning. Get rid of your shopping addiction.
- If you have credit card debt, talk to the credit card company and ask for restructuring or negotiate for a payment plan. [N[Note: This is not in the video but check out this case, Macalinao vs. BPI, which I think can help you when negotiating payment with your creditors.]li>
- Having a credit card is good if you always pay your balance in full every month.
- There is an existing company which has a negative information database but the information was only about utility bills and bank records. You can go to the Bangko Sentral ng Pilipinas (BSP) Financial Consumer Protection Group, write a letter, and they will help you. [N[Note: Check the BSP website to learn more about the Financial Consumer Affairs Group and their Consumer Assistance Mechanism.]li>
- Be aware of the consequences of your bad credit behavior so that you can keep your actions in check. Change your behavior if needed.
- Banks have a fiduciary duty, a duty to take care of the money being entrusted to them by their depositors, so they also need to be prudent in choosing who to give credit to and how much. So, it’s good to maintain a good credit record.
- At the moment, the basis for banks’ credit decisions are a combination of:
- Loan officer’s personal judgment
- Financial information submitted by the borrower
- In some banks, data analytics
- Credit bureaus with only negative information
- Bank records of current clients
- Connections with people (or other banks) who know the prospective borrower and his/her credit history
- Asking the neighbors
- Very little information can be gained from other banks. If a client is good, they will not say for fear that the client might be poached. If the client is bad, due to ethical reasons, they will not badmouth a loyal client.
- Advantages of having a centralized credit database and RA 9510:
- If the credit record of a borrower is good, he/she can shop for a better deal from the different banks and lending institutions.
- Banks can manage their risks better and enjoy more profits
- In rejecting a loan, banks can only consider as basis the credit history of the borrower for the past 3 years. The bank needs to explain to the borrower the reason his loan application was denied so he can fix it.
- It will be an equalizer because it will eliminate guesswork, biases, favoritism, etc. currently present in lending institutions.
- It will speed up the processing and lower the cost of loans for good borrowers
- Good borrowers can borrow based on good credit history without collateral
- Good borrowers can get better rates, better terms, or larger amounts
- Credit history can be established from utility bills and mobile phone payments. So, even if you don’t have a credit card, you don’t have SSS payments, or you don’t have a bank account or transactions with financial institutions, you can still build credit history.
- Good credit history is also considered in hiring.
- If you have a bad credit history, you are effectively prohibited from over-borrowing since the lending institutions will not anymore lend to you.
- Based on a study of the effects of a credit bureau set up in China, it was observed that jobs, Gross Domestic Product (GDP), and domestic spending have all increased due to the said credit bureau. Jobs increased because Small and Medium Enterprises (SME’s) who were previously unable to get credit were granted loans because of a good credit record.
What is Negative Credit Information?
Based on the Frequently Asked Questions (FAQ’s) of the CIC website, negative credit information refers to information/data concerning the poor credit performance of a borrower, such as, but not limited to:
- Past due
- Defaults on loans
- Details on the settlement on loans that defaulted
- Adverse court judgments relating to debts
- Petition or orders on suspension of payments
- Corporate rehabilitation
- Other pending court cases (either plaintiff or defendant) related to credit transactions or cases that will affect the financial capacity of the borrower
- Inclusion in bouncing check checklist
- Cancelled credit cards
- Other information that may be determined by CIC
So, if you don’t want to have a negative credit record, take care that you don’t have any of the above.
How long does credit history last?
I’m sure a major concern for those who have negative credit information in their credit history is how long will this remain in their credit history?
According to Section 4 (h) of RA 9510:
The negative information on a borrower as contained in the credit history files of borrowers should stay in the database of the Corporation unless sooner corrected, for not more than three (3) years from and after the date when the negative credit information was rectified…
How can you repair your credit score?
Section 4 (h) of RA 9510 also states that the negative information can be rectified through:
payment or liquidation of the debt, or through settlement of debts through compromise agreements or court decisions that exculpate the borrower from liability. Negative information shall be corrected and updated within fifteen (15) days &om the time of payment, liquidation or settlement or debts.
What is a good credit score?
I believe a big factor in having a good credit score would be to have “Positive Credit Information” in your credit history. Section 3 (m) of RA 9510 defines Positive Credit Information as:
information/data concerning the credit performance of a borrower, such as, but not limited to, information on timely repayments or non-delinquency.
In other words, be a “good payor”.
Before you apply for a home loan…
If you are planning to get a home loan, for example, to finance your next real estate deal, make sure that you have a good credit score and your credit history is clean, at the very least, for the past three (3) years. For assistance or for more information, you may consult the BSP through their Consumer Assistance Mechanism or the CIC itself.
So, what can do you think of this new development? Let me know below.