?Le verifico el credito? Did Anyone Check Your Credit?

If you live in the US, everyone seems to talk about credit histories and FICO scores.  Susie Orman is constantly on her soapbox extolling people to improve their FICO scores.  We take it for granted that no loan is approved unless the bank or credit union has first checked an applicant's credit score and history.  The better your score, the lower the loan rate will be.  Bad history, you're going to be denied or you'll pay very high interest rates.

I'm old enough to remember that credit scores weren't always around.  In the mid-1960s, I used to work in my father's credit union during the summer.  He loved gadgets and signed up with the first batch data processing system then available through a local bank.  He then joined the credit service bureau - one of the first credit unions to do so.  Up to that time, credit history documentation was the exclusive realm of the big banks and they didn't like credit unions invading their territory.  He had a little machine in his office that spit out long tapes (like the old teletype systems) giving the credit history of various loan applicants.  That eventually turned into fax transmittals followed by weekly and daily data downloads, and then by sophisticated and expensive loan module software that pulled all the information in 1 to 5 seconds while a loan officer interviewed a client.

I was thinking the other day that helping small entrepreneurs and poor people establish good credit histories is one of the greatest services that we can offer our clients.  It's something we're doing at Prisma Microfinance, but have never really marketed the concept to clients.  It will have profound impact on the future of micro-credit clients.

In Central America, we have worked for over 6 years to establish the bureau.  Our General Manager in Honduras, Orbelina Valeriano, was one of the leading advocates of the micro-finance industry joining with banks to get the bureau working.  Now close to 70% of our new clients have some sort of prior credit history that we have been able to pick up from the credit bureau, and 100% will earn a credit history that Prisma reports to the bureau.  Nicaragua uses the credit bureau report as an integral part of its loan underwriting process.

With good credit histories established, our clients are set to fly.  As they enter successive loan cycles, their credit histories become more robust.  If they have to approach a bank in the future to apply for much larger loans to support their businesses or even to purchase a house, it'll be so much easier for them.  Credit bureaus are currently being developed for Central Asia and the Balkans.  How great is that? 

Comments

[Julia]

I once bought the house I was living in, and the only way I could afford it was if I got a specific interest rate, which totally depended on my FICO score. So I found myself sitting in a strangers office waiting for a computer to spit out a number and tell me if I could remain living in my home. It was very weird. Luckily, I got the magic number.

The new Honduran loans are going quite fast, I don't think any have lasted more than a day. That's so great to see. I think all this capital going to Honduras will really make a difference. I'm getting in on as many as I can, my portfolio is now over 1/3 loans to Honduras. And I made my 100th loan today, and I'm really glad it was to Honduras.

[Kendall Mau]

Julia, congratulations on your 100th Kiva investment, and thanks for the honor of it being a Prisma Honduras project. Isn't it great that even the smallest borrowers will soon be able to have credit histories? Kendall

[Ramon]

Hi Kendall,

you're not the only one touting the importance of credit histories for MFIs in the developing countries. When I visited SwissContact in Lima, Perú last Februari, a NGO that works as a technical advisor to MFIs over there, one thing they explained to me that Perú was in the process of consolidating the various individual credit reporting methods so it would become available as a tool to quickly assess the "creditability" of an aspiring borrower. Until then, the MFIs would call around to local banks to check that applicants didn't have outstanding loans or bad repayment histories elsewhere.

[soapbox]I guess that this is an essential step in the financial development of a country. Establishment of credit bureaus will allow lenders to assess the risk of lending, and therefore adjust the cost of the loan appropriately. This will eventually make cheaper loans more widely available, and entice economic activity. This will unlock the economic potential of a large group of people that have been economally marginalized until now.[/soapbox]

All I can say is-- thanks in the name of those people for whom you (and other MFIs) are the only alternative.

BTW-- one of the topics I'd be interested in (and which fits in the overall scope of your blog) is, how Prisma does due diligence on their borrowers that don't have much of a credit history...

[Kendall Mau]

Ramon, we're on the same wave length. I was just going to write an article about how we underwrite loans to new clients who have no credit history and very little cash flow. Thanks for the suggestion. Kendall

[Kay]

Kendall, I also think that establishing a credit history is extremely important, just based on my own experience. I just wonder, as these new credit bureaus are established, whether you have any concerns about identity theft, since, as you know, that can be devastating for anyone caught up in it. Kay

[Kendall Mau]

Kay, very good point. The 2 companies involved in managing the local credit bureau are the same ones dominant in the US. They have built in all the safety features currently available to US customers. Of course, you can't be 100% sure they work. We have a particular problem in Central America in that so many people have the same names, they do not often change their legal status in common-law marriages, there are no street addresses, and so forth. We insist they use their "cedula" or government-issued identification card number. Kendall