New credit rating system to reduce default

Scientists at the University of Edinburgh revealed a new credit rating system that would prevent many people from falling into debts. It is believed that the new system will reduce the numbers of credit defaulters. This method uses extra criteria to accurately predict debt defaults.

Apart from the credit history, this method also takes into account your general economic conditions.

Professor Jonathan Crook of Edinburgh University's Credit Research Centre said: “Increases in earnings and the FTSE index - which are indicators of an improving economy - all provide conditions for reduced risk of default.” The FTSE is a commonly used benchmark for the performance of equities traded on the London Stock Exchange.

On the other hand, higher interest rates, greater unemployment and rising house prices directly affect people’s repayment capacity, resulting in higher risk to the lender.

Scientists believe that considering interest rates, consumer confidence and earnings will enable the lenders to accurately assess the risk of possible default. They hope that banks and building societies will soon test the system. Presently, most of the lenders rely on borrower’s credit history, income and occupation.

Generally speaking, the personal debt problems in the UK have increased manifold. The number of people seeking financial advice from debt charities is increasing. If this new system proves good, it will help many borrowers from falling into debts.