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What your bank knows about you

What your bank knows about you

OPINION: Why you should be wary about the data collected by credit rating agencies, and how it affects your ability to get a loan.

March 24, 2010 5:29 by

In some economies, the notion of the ‘credit score’ conjures up ominous images.  American consumers joke that the dreaded rating feels like a yoke, determining everything from how much they pay for their mortgage, to whether they’re offered a job.

In the Middle East, credit reporting technologies are becoming increasingly sophisticated.  Local agencies are beefing up their services, and many have joined the Middle East Credit Reporting Association (MECRA), which aims to enhance credit information sharing across the region.

Information collected by these agencies is compiled to generate a score, which is used by banks and other lenders to determine a borrower’s creditworthiness (an indication of how likely it is they will repay a loan, mortgage or credit card bill).

This is both good and bad news for consumers in the Middle East.

The good news is that the new system – once it matures, at least – could allow banks to make more rational decisions about granting loans.

In the past, most banks in the Gulf region had incredibly lax lending policies. They would grant a loan to almost anyone, regardless of their salary or ability to pay. Now, given the economic recession and increasing loan defaults, banks have tightened up on lending; many refuse to grant loans to anyone except the highest earners.

This is unfair because it assumes that, just because someone earns more, they are more likely to pay back a loan – regardless of their credit history. It assumes that someone earning, for example, $5,000 a month, is very likely to meet payments on a $50,000 loan; it also assumes that someone earning $500 a month would be unable to meet payments on a $5,000 loan. But just because someone earns more, it does not necessarily mean they are more likely to pay back a loan.

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