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The news earlier this month that Al Etihad Credit Bureau has started issuing credit reports makes personal finance all the more personal. Going back two years, for all the times that you remembered to pay the credit card bill on due date or before, perhaps rounding the amount off to the nearest 100, all the times you paid your electricity bill days before deadline, and when you paid off the last instalment on the loan you had taken. Someone is watching.

State news agency WAM reports, “The credit reports will include consumers’ debt obligations and payment behaviour pattern for the past two years. These will no doubt contribute positively to the banking sector, playing an important role in the assessment and management of credit and possible losses resulting from non-performing loans. Individuals will, in turn, be able to have a comprehensive overview of their current financial obligations and debt payment frequency and consistency over the past two years.”

The credit bureau collects information and data from various sources such as credit card companies, banks, financial institutions, mortgage companies, private organisations and utility firms, among others. It will help develop a history of borrowers and assign a credit score to individuals as well as groups and companies. A quick look at a sample credit report forces individuals to consider their financial report.

A spokesperson from Emirates NBD tells GN Focus: “All credit reports will contain two years’ history of active contracts and a five-year default history for any closed or written-off contracts. We believe most of the relevant information is available and additional information will be added in due course that would supplement the banks’ abilities to get a 360-degree view of a customer’s financial well-being. Our understanding is that customised credit scores will come online in due course. Portfolio alerts and portfolio scrubs facility, etc., will also be available to banks shortly.”

Overall, the establishment of the credit bureau is likely to slow down lending. Consumers should expect fewer loan sales than have been evident over the past few months. For instance, Emirates Islamic concluded such an offer days before credit reports were made available. 

Suvo Sarkar, General Manager, Retail Banking and Wealth Management, Emirates NBD, tells GN Focus, “There is a general increase in demand for all personal loans including cards.

“We notice that customers avail personal loans for a variety of end-uses including travel, education, investment and also for financing property.”

Dynamic pricing

One of the biggest fallouts of credit reports being available is the possibility of differential pricing based on a consumer’s profile. Even if you are eligible for a personal loan, rates may depend on the score. In mature markets, those starting on a financial journey are advised to create a credit history. If you have never taken a loan, there is likely to be no public profile of your debt behaviour, which leaves you ineligible for the cheapest loans. The more loans you have, the more opportunity to demonstrate you are a good credit risk.

For individuals, experts say, it’s crucial to recognise that debt is not always bad. Jessica Cook, Private Client Adviser at AES International, a wealth management service, says, “There is an argument for and against paying off all your debt. It needs to be taken on a case-by-case basis. If there is something you need to save for, such as children’s education, and if your loan payment is low it might be advisable to keep it. On the other hand, debt is historically expensive. The longer you have it the more it is going to cost you. For instance, if you have a three-year window to save for school but all of your money is going to pay off your debt, it is not a good situation.”

For UAE-based consumers, if one has a good credit record and long-term relationship with the bank at multiple levels, they may pay less interest than a walk-in customer. Both ADCB  Touchpoints and Mashreq’s Salaam programme let consumers earn points not just not for credit card use but for mortgage, car loans and their account balance too.

“The pricing for personal loans is based on various factors such as cost of funds for the bank, competitive landscape, size of the loan and customer segment,” says Sarkar.

Cook says, “If you are a premier customer, we’ve seen loan rates vary, also depending on the amount you want to borrow. If the special customer gets an interest rate of 7.5 or 8 per cent, a walk-in customer may get up to 12-13 per cent.”

Varied rates

In some ways this approach integrates personal loans into the wider world of personal finance. Financial advisers recommend keeping the loans in check, with a view of your overall financial goals. Banks have found that offering proactive financial advice pays off. “We have launched a campaign to help customers take a decision on the need for the money. They need to consider why they require a personal loan, as well as their repayment capacity prior to taking it,” says Sarkar.