President Arroyo signed into law the Credit Information System Act (CISA) on October 31. CISA paves the way for the creation of a centralized credit information system that can be used by lenders to assess the ability of an individual or a corporation to pay loans. This comprehensive and detailed system will be run by the Credit Information Corporation (CIC), which the law created.

The CIC, to be chaired by the Securities and Exchange Commission, will function as a central bureau of reliable and updated credit data provided by lending institutions like banks, quasi-banks and credit card companies. With a comprehensive information system in place, lenders will be able to efficiently and more accurately assess the credit worthiness of borrowers. The centralized system is also expected to reduce processing time for credit application which will result in lower transaction costs.

The new credit info system doesn’t bode well for borrowers who are habitually delinquent in paying their obligations. Any negative information will be reflected promptly on the borrower’s credit history and new loan applications will likely be denied. This blot in the borrower’s credit record will also stay in the database for up to three years. Which is actually good for both the lender and the borrower.

By lending only to credit worthy individuals and businesses, financial institutions will not be exposing themselves to unnecessary risk. The financial crisis that’s gripping the US and many other countries can be traced to bad corporate practices of lending to people who were likely to default in their payments. And default they did! So now the global economy is reeling.

An individual should not be allowed credit if it is obvious that he will not be able to pay back. Lending him money will not help solve the borrower’s financial problems; it will only sink him deeper into a debt hole. I’m really baffled at how someone can have so many credit cards and almost all of them maxed out. It is probably due to lax policies in assessing credit worthiness or the lack of accurate credit data which the credit companies can check. With the establishment of the CIC I really hope that we will have more responsible credit card holders who won’t bite more than they can chew.

Borrowed money is one of the important resources you can use to achieve your financial goals. Do not allow yourself to be stripped of this valuable resource by tainting your credit history. Borrow money only if you have to and be responsible in paying back what you owe. Here are some tips which will help you stay out of huge debts and keep your credit record pristine.

Do not borrow money to buy things you don’t really need. A most “efficient” way to accumulate huge amounts of debt is buying (or charging to a credit card) a lot of things that you can live without. Do not abuse your credit card. Don’t use it to support a lavish lifestyle. Borrow money only for important things and for emergencies. A simple rule to follow in using your credit card: DO NOT use it to purchase something that you cannot afford to pay in cash. If you want something “nice to have” but unimportant, save for it instead of buying on credit.

Keep only 1 or 2 credit cards. The more credit cards you have, the more likely you will overspend and the bigger possibility you can get into debt trouble. If you have more than a couple of credit cards, retain the ones with the most favorable terms and transfer the balances from the other cards. Get a pair of scissors, cut-up the unwanted cards and inform the concerned credit card companies that you will no longer use their card.

Treat your credit card as if it’s cash. Buying with credit cards doesn’t feel like spending real money which makes it easy to spend more than you have to. Treat your credit card like cash so you will spend less. Set a limit as to how much you will charge to your credit card monthly and do your best not to exceed it.

Pay more than the minimum. Paying only the minimum every month will contribute in growing your credit card debt to unmanageable levels. If you charge P3,000 monthly to your credit card and pay only the minimum amount, in 20 months you will have paid close to P29,000 and your outstanding credit card balance will be over P50,000.

Use other sources of money to pay your debt. Be imaginative in finding money for debt payment. If you have money “sleeping” in a low-interest savings account, use it to pay your debt. Would you rather pay 3.5% in credit card interest monthly than give up 1% in deposit interest annually? I don’t think so. Consider taking out a less expensive loan to pay your existing loan obligation. But never borrow money that charges interest that’s higher than what you are paying now.

Get yourself and your family insured. The wisest spender is not immune to unfortunate incidents like accidents, sickness and untimely death which can give your finances a major wallop. Protect your family from financial losses and potential heavy debt by getting yourself and your family insured. At the very least you should have a life insurance and healthcare or hospitalization insurance.

Posted: October 20, 2008
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