What Is Credit Score? How Can It Be Improved? Here's What You Need to Know About Findeks

In a sense, the questions about the credit score, which represents the financial reliability scores of individuals and legal entities, are addressed in Papel Blog...

What is a Credit Score?

The credit score is an evaluation system that measures an individual or institution's financial history and credit payment habits. The credit score is expressed with a value ranging from 0 to 1,900 points, and this score reflects the credit history, timely payment status of debts, credit applications, and financial situation of an individual or institution.

How Did Credit Score Emerge?

Credit score originated in the United States in the 1950s and was adopted by financial systems in various regions of the world from there. With the widespread use of computers in the finance sector during these years, the financial history of many credit users could be stored and examined much more easily than before. Thus, financial institutions began to develop models that express the financial reliability of individuals applying for credit in numbers based on the database they possessed.

Over time, credit score became an industry standard. It started to be calculated and play a decisive role in credit usage with the establishment of the Credit Registration Office (KKB) in Turkey in 1995.

Who Provides the Credit Score?

In Turkey, the current indebtedness ratio, past payment habits, and other financial behaviour information of individuals and legal entities are recorded by the Credit Registration Office (KKB). As the Credit Registration Office has access to the profiles of all credit users in the country, it is the sole authorized institution to determine the credit score.

Through the Findeks platform created by the KKB, individuals and legal entities can create memberships and learn their credit score, as well as obtain a risk report.

Factors Affecting the Credit Score.

The factors affecting the determination of the credit score may include:

• Credit history
• Credit card usage
• Amount of debt
• Closure of credit accounts
• New credit applications
• Types of credit usage

It's worth noting that the credit score system and credit score ranges may vary from country to country.

What Determines Your Findeks Credit Score?

Several factors influence the calculation of your Findeks Credit Score. For instance, having substantial debt and failing to make timely payments can adversely affect your credit score, while abstaining from utilizing banking products over an extended period might also lead to a lower score.

The criteria that influence your Findeks score, along with their respective significance, are outlined as follows:

Payment habits regarding individual loans and credit cards (45%)

Status of existing accounts and liabilities (32%)

Frequency of credit usage (18%)

Opening of new credit lines (5%)

Credit Product Payment Practices

Prompt settlement of loan installments or credit card dues before their due date ranks prominently among factors influencing your credit score. Conversely, inconsistent repayments can significantly tarnish your Findeks rating.

Current Account and Debt Ratio

This factor evaluates your financial standing based on your debt levels and credit limits. Typically, this is represented in the Findeks report as a "Debt/Limit" ratio.

Intensity of Credit Utilization

Regular engagement with credit facilities and diligent repayment of debts are crucial for a favorable credit score. For individuals who neither avail credit products nor adhere to a consistent payment schedule, attaining a high Findeks score may prove more arduous.

New Credit Initiatives

Recent financial undertakings, especially those lacking a defined payment history, could elevate your perceived risk factor, consequently diminishing your score.

In a nutshell, securing a superior credit rating necessitates the judicious use of credit instruments (such as personal loans, housing loans, credit cards, etc.), settling debts prior to their due dates, and mindful management of your credit limit vis-à-vis indebtedness ratio.

How to Check the Credit Score?

 

The Credit Registration Office has created a Findeks platform for individuals to check their credit score. Anyone who signs up for this platform with their Turkish identification number and personal information can generate their credit score and risk report. Similarly, legal entities can also register with company information on the same platform to benefit from services such as risk report and credit score inquiry.

Users can query their own information, and with the consent of the other party, they can also access the credit score and risk reports of others. For example, when purchasing a car rental service, the company can view your credit score and risk report through Findeks if you give permission. This method is often preferred when establishing a business relationship from scratch.

In What Cases Does the Credit Score Decrease?

Several factors can lead to a decrease in credit score. Some common situations that can cause a decrease in credit score include:

Payment Delays

Failure to pay credit card bills, loan installments, or other debts on time can result in a decrease in credit score.

Credit Card Usage

Using a significant portion of the defined credit limits, especially accumulating high debt balances on credit cards, can negatively impact credit score.

New Credit Applications

Frequently applying for new credit or credit cards can be perceived as a potential credit risk and can lower credit score.

Closure of Credit Accounts

Closing active credits before their maturity or having closed credit deposit accounts can result in a decrease in credit history or deterioration, leading to a decrease in credit score.

Defaults and Foreclosures

Consistently defaulting on payments or facing foreclosure on debts can significantly decrease your credit score.

Types of Credit Usage

Having only consumer loans or lacking credit diversity can lower your credit score. Having various credit types demonstrates that the consumer has experience in different types of credit (such as mortgage loans, car loans, and credit cards) and can manage them effectively.

Each of these factors can contribute to a decrease in credit score. To maintain the highest possible credit score, it is important to pay debts on time, keep credit usage balanced, and manage credit applications carefully.

Impact of Credit Card Usage

Credit card usage can have certain effects on determining the credit score. For example, late payment or non-payment of credit card debt beyond the due date can cause a decrease in credit score. Additionally, using the entire credit card limit, constantly requesting limit increases, and receiving rejection responses can reduce the credit score.

What matters when determining the credit score is not how much debt a person has but how faithfully they adhere to the repayment schedule of that debt. Therefore, it is important to pay off credit and credit card debts within the specified time frame. In the case of credit cards, it is essential to pay the minimum payment amount stated in the statement by the due date. While paying off the total debt amount will improve limits and debt ratios, it will not directly affect the credit score. In installment loans, the installment must be paid on the specified payment date. Early payments, like late payments, can cause a decrease in credit score.

Never having used a credit card or never having opened a bank account can lead to an extremely negative situation where no trace of a person's financial history can be found, resulting in the inability to calculate a credit score.

Effect of Assets and Collaterals on Credit Score

Individual assets (such as securities, real estate, etc.) are among the values ​ a person can present as collateral when borrowing a loan. The presence of tangible assets, such as houses, shops, land, cars, etc., registered in a person's name does not have a direct effect on the credit score. However, a person's asset status can be accepted by banks as security in determining credit limits. Another factor that financial institutions pay attention to is the existence of verifiable, monthly stable income.

Apart from these, some insurance products and private pension plans (BES) can be presented as collateral when borrowing a loan. BES contracts presented as collateral cannot be canceled while the credit debt is ongoing, and state contributions are excluded from this collateral.

How to Improve Credit Score?

Authorized institutions continuously update credit score at certain intervals. Here are some steps that can be taken to improve credit score:

• Making Payments Regularly
• Reducing Debts
• Keeping Credit Accounts Open
• Limiting New Credit Applications
• Credit Diversity
• Reviewing Credit History
• Allowing Credit Card Limit Increases
• Long-Term Financial Planning

Making Payments Regularly

Regularly and timely payments of credit card debts, loan installments, and other bills positively affect credit score.

Reducing Debts

Reducing credit card debts and other debts decreases the credit utilization ratio and increases the credit score.

Keeping Credit Accounts Open

Instead of closing unused credit cards or credit deposit accounts, keeping them open extends the credit history and increases credit diversity, thus positively affecting credit score.

Limiting New Credit Applications

Frequently applying for new credit cards can lower the credit score. Therefore, it's beneficial to avoid new credit card applications unless necessary.

Credit Diversity

Having different types of credit accounts, such as mortgage loans, car loans, and credit cards, increases credit diversity and raises the credit score.

Reviewing Credit History

Regularly obtaining a credit report and checking the credit history serves as a guide to identify and correct errors. Having accurate information in the report ensures the accurate calculation of the credit score.

Allowing Credit Card Limit Increases

Increasing the limits of existing credit cards can decrease the credit utilization ratio and improve the credit score. However, you should be careful when taking this step and control your expenses. Customers with already low credit score may receive negative responses to limit increase requests, adversely affecting their credit score. Adhering to the limit increase limits recommended by banks can be a good way to increase the limit.

Long-Term Financial Planning

Setting future financial goals and making long-term plans to achieve them will improve one's overall financial situation, which will have a positive impact on the credit score.

These are the steps that can be taken to improve credit score. However, it should be remembered that increasing credit score is a time-consuming process. Therefore, it's important to be patient while following the steps.