Credit Scoring & Bank Restrictions
Countless times, individual customers have walked into bank offices,
pleasing for a loan to cover their urgent needs. In every case, a unique personal
story was passed off, explaining the reasons behind a loan application are deeply
serious and life-altering.
Plenty of the times, the financial requirements are so enormous that the actual cost of the loan eventually exceeds the initial interest
rate estimates. This happens because customers often struggle to be consistent
with their repayment schedules because of new and unpredictable daily
expenses and when they were forced to renegotiate, they used to face extended
repayment periods, turning the total debt into a significant long-term burden.
To begin with, during the late 90s and mid-2000s, banks
frequently approved loans without conducting much hard credit checks. This shift
toward tighter credit checks didn’t just happen by accident, but it was largely
pushed by Basel Accords (Basel II & III).
These international regulations basically force banks to get much smarter and more transparent about how they
measure risk, making sure they keep enough capital on hand to stay stable when
things go south.
Consequently, many borrowers found it impossible to service
their debt, as they essentially lacked control over their
financial obligations.
If someone looks around the social media, he will understand that social
media are often filled with satirical content mocking how easily banks once
approved loans for trivial reasons, such as magnificent vacations in Ibiza,
phantasmagoric graduation ceremonies, an extra buying new family car, or
extravagant weddings accompanied to a luxury borrowed style.
This habit was the normal situation, when there was the dominating delusion of prosperity. To
keep on with the field of credit cards, someone can understand that this field was
even more extreme. There was an extraordinary variety of products that can be
used by the whole family. For example, one for the husband, one for the wife,
and even for the children, for covering unexpected daily expenses. The
“unexpected” expenses usually weren’t calculated for payment in full, so they
became a debt with high rates.
This delusion of financial affordability and gluttonous behavior, lead the
majority of borrowers opted for the minimum monthly payment, by giving out just
2% of the balance, which was effective enough to mortgage their own and their
children’s future. The results were that, as soon as a credit limit was reached, a
new card was often issued to the household and by that time, family debt tended
to be two or three times higher than the actual cost of the products consumed.
Customers essentially trapped their finances for years, often
without realizing the coming consequences and post-crisis, the landscape has
shifted dramatically, so after a less demanding period of giving away loans, the
credit check procedure has become stricter, even for issuing a credit card with a
narrow credit limit balance. Therefore, in the frame of this thesis, someone can
say that it is not just a theoretical exercise but a practical observation.
Having experienced the financial systems of both Greece and the UK, I noticed a totally
different way of facing the usage of credit scoring tools. To be more specific,
maybe in the UK, the credit score is a promoting tool, but in Greece, there is a
chance that is a tool for cutting people from receiving financial products.
In Greece, there are still no widely accessible mechanisms to inform the
public about their creditworthiness, except Teiresias, where you can apply to be
informed about your personal score, but in a less developed form as in other
countries force them. In contrast, the UK has developed a comprehensive
"finance factory" that constantly informs citizens of their credit scores, ensuring
that financial products are sold to trustworthy individuals who can realistically
repay them.
All in all, to explore the necessity of developing accurate and robust Credit
Scoring systems.