Notes

Axis Capital Funding: Improvement in Credit Scores


Since the global economic downfall in 2008 which caused many stocks to plummet and left many individuals in debts, the world has known its lesson. Thanks to the efforts of many people, nations are slowly regaining its former glory.

The country to be most affected is the United States of America. The great recession which started in December 2007 to June 2009 of almost 19 months has affected countries of as far Indonesia and Africa.

According to Axis Capital Business Funding Group, a source of credit loans for small business owners in USA, this downturn in economic activity served as a lesson for current trend in credit ratings of individuals.

As credit scores improve, the flow of credit to consumers will increase. In the first three months of 2015, credit card balances increased by over $20 billion and this trend is expected to accelerate. People are applying for more credit, and banks are more willing to lend.

In many cities, individual credit scores also increased in percentage as many people are becoming aware of its importance. In Jakarta, scams and fraudsters who greatly affect the city’s economy are slowly decreasing in number. In Singapore, certain limitations are being set for loans and cautious computation is being sought after.

After the crisis, we learned our lesson and went through a period of difficult de-leveraging and responsible budgeting. Banks also learned their lessons, and are now only making loans to creditworthy borrowers with stable jobs and good income. However, this convenient narrative ignores two simple facts. First, a big part of the de-leveraging resulted from banks writing off bad debt. And second, most negative information disappears from your credit report in 7 years, including home foreclosures. Even Chapter 7 bankruptcy, which is the ultimate negative mark, is gone after 10 years.

The Great Recession happened 7 years ago. Over the next few years, the negative marks of the Great Recession will disappear completely from the nation’s credit reports. Scores will increase. And banks will start lending to the same people, again.

When a bank makes a lending decision, it is based upon information available in credit reports. The credit scoring models can only use data available on credit reports. And almost all negative information is gone in 7 years. According to FICO, “it’s a common misconception that a foreclosure will ruin your score for a very long time. In fact, if you keep all of your other credit obligations in good standing, your FICO can rebound in as little as 2 years.”

Because most banks tightened credit after the 2008 crisis, it became almost impossible to get new credit. And, as a result, it became very difficult for people to borrow too much because the credit just wasn’t available. But now it is.

Our credit scoring system is built to have an automatic credit score jubilee. Mistakes and negative events in the past will be forgotten. Over time, our scores will improve so long as we don’t get drunk on credit too quickly.