Did you borrow with on a credit card and, even though you handled the rest of your accounts well, fell behind on your card payments and stained your credit history?
That is the case of thousands in Costa Rica, who for some reason or another, got into financial problems with their plastic, resulting in a bad credit score and not being able to obtain a bank loan, lease a vehicle or take out a mortgage.
However, if the General Superintendency of Financial Institutions (Sugef) approves a reform proposal in its credit risk measurement system, that stain on card credit would be completely wiped out and start anew.
According to the director of Technical Services at Sugef, Genaro Segura, currently, in Costa Rica there are 78,000 people with a stain on their credit history, of which some 77,000 are due to credit card debt.
The official explained that, though these debtors have problems with payments to their cards, most of them pay attention to the rest of their debts, such as mortgages and vehicle purchases.
However, by falling behind in their payments on the card debt, they fall into the category of “bad risk” for lenders such as banks, financing and leasing companies, among others.
Being placed in this group means that they will have their credit record stained for four years (48 months). During that time, they cannot obtain a bank loan and may affect other banking transactions.
“Although the person is to up-to-date, improved their ability to pay and pay attention to their debt, after it is stained, their condition does not improve, but remains in that condition for 48 months,” Segura explained.
Banks rate their clients by scores according to their ability to pay. The higher the score, the greater the chances of accessing a loan. In contrast, if the score is low, the probabilities are lower.
Sugef’s proposal is to clean up the file of some 63,000 people for whom the credit score would improve if the stain is eliminated for payment problems with a card.
Segura said that of that group, about 38,000 would have a good credit score if the stain is removed.
Another 25,000 it would improve their rating, though not reaching the best level. “These are people who attend ‘more or less’ their credit operations, but do not do so badly to be in the worst category,” explained Segura.
The remaining 15,000 people, with payment arrears of up to 150 days, would definitely remain in a “bad” category.
“This (the reform) would allow those who do attend well to their payments, can see their situation improved,” added the official.
That is to say, that of the 78,000 people now with a “bad” credit rating, with the approval of the reform, only 15,000 would remain in that category, while the others would have an opportunity to improve and keep a good credit rating by their actions.
According to Segura, this is an initiative that must be approved by the National Council of Supervision of the Financial System (Conassif) of the Sugef to send it to the banking entities for consultation.
“If approved, the reform would not only help debtors but also banks, which would see a reduction in the costs of credit assessments that must be made to high-risk clients,” said Segura.
When is the credit record stained?
This situation can occur in four circumstances:
- When the bank passes the dent to judicial collection and takes an asset from the debtor to settle the debt.
- When the debtor, after conciliation with the financial institution, voluntarily delivers an asset. This is payment is called “dación de pago” in Spanish and is defined as the transfer of an asset to the creditor in compensation for a debt. In 1 above the asset is seized, in this, the asset is voluntarily transferred.
- When, due to the debtor’s lack of payment, the guarantor assumes the debt.
- When the bank passes “uncollectable” a debt because it sees that there is very little chance of the debt being paid.
In this last ranking, are debtors of credit cards.
The reform promoted by the Sugef to clean up the history of these 63,000 people is to eliminate two of these four causes of credit scourge: the “dación de pago” and the “uncollectable”.
Interestingly, according to Segura, “In the last four years, only 153 cases have been reported stained by dación de pago.”
Another push: three payment arrangements instead of two
Another option for Sugef to alleviate the pressure of those with a tight credit history is the possibility of opting for three payment arrangements instead of two, as is currently the case.
Today, when the client has a debt that he or she cannot afford, the financial system allows two refinances in a period of two years (24 months).
That is, if today, someone with difficulties to pay a debt had requested a payment arrangement in the last two years, they have the possibility of requesting another without his operation becoming “special”.
Who benefits from the reform?
The reform promoted by the Sugef is expected to promote economic growth, generating more confidence and allowing banks and financial institutions to grow their credit portfolio.
For debtors with a stained credit record due to their poor handling of their credit card debt, they have an opportunity to improve their situation, obtain loans where it was impossible before, for say a new car or start a business
or take out a mortgage on a house.
For the debtors in the ‘bad’ category, nothing changes.
The previous week, President Carlos Alvarado said he had asked Sugef and Conassif to work on a proposal to “relieve” people who have a credit stain and, for that reason, cannot opt for a housing loan or start a business, for example.
Also the previous week, the Banco Central (BCCR) – Central Bank of Costa Rica – agreed to reduce the minimum reserve for financial institutions, from 15% to 12%, with the objective of stimulating credit in the country’s economy.
The reserve represents a percentage of the deposits of banks, financial and mutual companies,, which must be kept as a reserve, in cash, in the vaults of the Central Bank.
Source: La Nacion (in Spanish)