1.Consumer Credit Risk

 Dear Readers,

I am writing this post in order to achieve a further knowledge about how credit scores work and if it is possible a consumer to improve his score by himself following simple steps. I will share all the achievements with the public interested because I think it has many advantage to understand this topic and maybe you can put it in practice. 

Most of you may think that this would be a great idea for a dissertation and I agree, unfortunately I am Master student that wasn't authorized/advised to do so due to diverse reasons. The primary reason was that the University believes it will take to long and so it should be done as PhD Research.

Well I decided to do it as a private researcher and I hope to achieve this goal with wise advises from you all.Many researchers have been done to understand how creditors can minimize their consumers risk but none have been done in the consumer perspective to improve it and gain simple benefits from it.

Consumer Credit Risk

It’s reasonable to say, that common people do not know how credit score works and who looks at them. It’s important to understand how much risk does a customer represents to a creditor and how interest rates are defined by risk score. The aim is to view across the customer perspective and how credit risk knowledge would be important for them. Explain if it’s possible for credit users to have influence on their credit score and to prove that is financial healthful to have control of it. 

Basic Concepts

Credit – The oxford dictionary defines credit as the ability of customers to obtain services or goods before payments, based on the trust that payment will be made in the future. (Oxford dictionary)

Credit risk – Credit risk is the lender risk of loss from a borrower that do not accomplish the payments as arranged.

Consumer or personal credit – It is defined as goods or services provided to an individual where the payments are made in the agreement conditions time and not in the moment of consumption. The Bank of England´s defines it as Lending to individuals. The most common types of consumer credit are credit cards, consumer’s lines of credit, retail loans and mortgages.

Credit bureaus – These are Companies that collect information from different sources and provide a consumer credit profile for a diversity of practices.  In United Kingdom are known as credit reference agency.

Credit score – This represents the creditworthiness of a customers in a numerical way based on statistical analysis, for example FICO score. The score is normally based on credit bureaus information, creating an individual credit report or credit history report.

A consumer score is calculated by five major components:

Payment history 

Credit utilization

Length of credit history

Types of credit used

Recent searches for credit

      

      During the last year I have been researching about if it is possible to define our own credit score following simple rules and behaviours.Just think about the advantages of improving your score, in the end of the day you are just improving your image for your creditors. What do you think your financial profile reveals? 

a    

I     Imagine the following case

         

     You have monthly average costs of 500 pounds and you are allowed to use (credit Limit or Plafond) 1000 pounds, your ratio between expenses and credit limit is 0.5. This ratio is regularly used by banks or financial institutions to define your credit profile. A simple way of improving your credit score is with just a phone call to your account manager. Probably he will be surprised by your request, as him to increase your credit limit although you do not need it to survive.

      Why?

      If you have been managing well your finances he will accept your request, this will generate a lower ratio.But, please, do not start increasing your normal expenses just because you can. In 6 months your credit score will be better, you will be less risky and you will be offered better conditions when required, for example in case of new findings or others that will be explained further. 

    

      Advantages of improving your score will be posted soon. In a period of financial weaknesses as the actual EU crises is going trough, principally my home country Portugal, few steps that can generate savings are always welcome.

 WE CAN DO IT, GO PORTUGAL!!!