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18.04.19

In the U.S. You Can’t Move Without a Credit Score: How would Israeli Credit Providers Adopt it?

Dun & Bradstreet

Over the next year, the Israeli economy is about to change significantly. For the first time, credit providers would have reliable data on their customers’ financial history and present. The question is which credit providers would adopt the most accurate policy for credit scoring models?

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Americans and Their Credit Score: A Love-Hate Relationship since the 1960s

Try to rent an apartment in the U.S. without a credit score. This is almost a “Mission Impossible”. Almost every financial action in the U.S. requires your credit score as a way of proving that you are customers who meet their obligations. This story goes back to the 1960s, when the U.S. adopted Credit Scoring models that resulted from a problem in the U.S. economy: Credit providers had no idea whether the person to whom they lend money is a person with a good chance of repaying them, or a person who tends to accumulate debts.

Thus the credit score started to evolve in the U.S., and in fact it provided a new tool for credit providers, which provides them with a significant indication of their chance to recover their loan and its interest, on an empirical basis, rather than relying on what the client says, how he looks and his rhetoric capabilities. This was a significant change as it enabled credit providers to manage their interest rate more rationally. “Risky” clients weren’t necessarily credit-less, they just had to pay higher interest rates on their loans.

The Non-Trivial Places where you would be asked to show your credit score in the U.S.

As credit scoring would be implemented in Israel under the Credit Databases Law, it is worthwhile to look also at cases where Americans took credit scoring one step forward. For example, in the American dating world, it is customary to reveal your credit score to your date on one of your first dates, and 42% of Americans say that this is an important criteria in selecting a romantic partner. The website Creditscoredating even helps its users find romantic partners with similar credit scores.

To us, as Israelis, this might seem extreme, but in the American society, which is based on capitalistic principles and glorifies economic success, a high credit score has an almost moral meaning – meeting your financial obligations is equivalent to behaving well towards others. Failing to meet such obligations seems like an injurious behavior. It is relatively customary to ask parents who register their children to kindergarten in the U.S. to reveal their credit scores, and this is before we review the trivial places where we might expect that a credit score would be required, such as banks or applying for loans from credit providers.

How Would Israeli Credit Providers Adopt This?

The Israeli society is different from the American society, and we probably wouldn’t see credit-score-based dating websites for Israeli anytime soon, but credit providers have a strong incentive to start and using credit scores. There is a simple reason for this: While until now a credit card company that wished to extend a loan for a certain person had to rely on his self-reports, bank account printouts and in the worse case, his tone of voice over the phone, credit providers now have a reliable tool that would indicate whether this person would repay the money or drag them into legal and collection proceedings.

Credit providers which would an interest rates model that would by adjusted to the borrower’s solvency might become more profitable. When a person with a low DB Score (credit score) would apply, the credit provider would be able to offer them an unattractive interest rate or refuse the loan. But in the case of a good borrower, who would almost certainly repay the loan, the credit provider, which knows that the chances of “having trouble” with collecting the loan are negligible, would be able to offer them a more attractive interest rate and thus attract customers of a higher quality, who are not “trouble makers”.

Meaning, credit providers which would adopt credit scores quickly wouldn’t be doing so out of some sort of “community service”, rather from a pure financial-profit interest, and may improve their business performance as a result. In the pre-credit-score period, most credit providers were forced to sell loans with unattractive interest rates out of their lack of information on the financial capabilities of each borrower.

Now, as credit providers are able to manage their risks more reliably, this could create a real competitive gap. Companies that would adopt the credit score model as a decision-making tool would quickly gain the ability to offer lower interest rates on loans to high-quality customers, thus attracting many more customers who previously considered several companies.

A Possible Development: People who Refrained from Taking Loans until now would Feel More Comfortable to do so

If credit providers in Israel would adopt a differential interest rate policy, that would be adjusted to the customers’ quality, it is very likely that high-quality customers, with a “Perfect” or almost perfect score, would be able to benefit from “cheap money” and start taking loans that seemed unattractive to them until now because of the very high interests in the market. Numerous credit providers would be able to benefit from expanding their clients base also to customers who don’t require “holiday loans” but loans for other, more financially-oriented, loans.

An Additional Scenario – The companies who would read the fine print of the report

DB Score is much more than just a number. The report is filled with data that can serve as a decision-making tool for credit providers. For example, a credit company that would decide that it would review not just the score, but also the trend, i.e., whether the customer’s credit score has been improving steadily over the past few years, and provide them with an attractive loan on this basis, would be able to create a dedicated loan product for such populations. Companies which would ignore the complete reports would actually miss business opportunities.

The Process of Adopting DB Score by Credit Providers

It seems that 2019 would be the adjustment year. In this year, many curious Israeli would start discovering their own credit scores and most of the credit providers would start to review the connection between the score and the borrower’s solvency. Beyond the score itself, there are many parameters that can be used by a credit provider as an indication on the customer, such as their leverage and obligo, whether they have history with the Official Receiver, are they sole proprietors, limited liability companies or exempt proprietors. It is interesting to note that the full report also indicates the customer’s trend – is their credit score in an improvement or deterioration trend, which would indicate the feasibility of extending a loan to this customer.

Over the next year, the Israeli economy is about to change significantly. For the first time, credit providers would have reliable data on their customers’ financial history and present. The question is which credit provider would adopt the most accurate policy for credit score models? Which credit provider would succeed in establishing a business model that would attract customers of a higher quality and which would use the new data intelligently. If you would like to read more on credit scores from a credit provider’s perspective, we prepared several other articles on this topic, such as 5 Risks you Take When You Ignore Credit Scores.

About אופיר שמואל View all posts by אופיר שמואל
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