Exploring Financial Health Scores: Beyond Credit Scores

Why Financial Health Scores Would Be so Much Better Than Credit Scores?

For a long time now, a credit score has been identified as the parameter to gauge an individual’s financial condition. The credit rating of an individual is based on his past advance repayment patterns, and is used to determine whether he stands credit worthy or not. In case where a person has defaulted in his loan repayment schedule in the past, or missed out on any repayment installments, he is granted a low credit score, which implied that he might not be eligible for any future loan schemes. The credit rating tools is basically a prediction of an individual’s future loan repayment behaviour, based on his actions in the past, which implied that if a person has failed to meet the repayment requirement of his loan at one point of time in his life, he is necessarily going to repeat the same again. However, this system cannot really offer a comprehensive analysis of a person’s financial health.

How is Financial Health Score Analysis Better Than The Credit Rating?

Officials at the Centre of Financial Services Innovation are committed to formulate an all-new analytical tool, with an approach to evaluate an individual’s current and past financial condition, more thoroughly. The basis of this particular tool is that an individual’s credit worthiness and his financial health can not be calculated based only on his loan repayment behaviour. An individual’s financial health is a wider pattern that involves other financial factors as well. Is an individual paying off his monthly bills regularly? Is he able to save a portion of his income, and is contributing to a retirement plan or the education expenses of his children? Are he and his family covered under any insurance coverage plans? These are a few of the various factors that are more adept at influencing an individual’s financial condition, as compared to a mere evaluation of his loan repayment behavioral pattern.

In a bid to obtain a comprehensive and in-depth understanding of the factors that influence an individual’s financial health, the Center of Financial Services Innovation has analyzed the data and inferences from abut 20 consumer finance research papers, and also take counsel from around 85 financial institutions and service providers.

What Are the Eight Key Indicators for Assessing a Person’s Financial Condition?

It will be appropriate to say that just like physical health, an individual’s financial health is also extremely complex, and is influenced more by remote external factors such as the world economy, and the level of financial help available to him. Although we are aware that our physical wellbeing is influenced by numerous other exogenous scenarios, yet we always start the evaluation of our physical health by keeping a track of key indicators such as blood sugar, cholesterol, weight and blood pressure. Similarly, to assess an individual’s financial health condition, the researchers at CFSI have determined eight chief factors that may be taken into account. These indicators aim at a more exhaustive analysis of an individual’s financial status and requirement, as compared to the credit rating tool.

• If an individual has been managing his expenses and savings in congruence with his monthly income, then he should be deemed capable of handling any unforeseen financial contingencies with resilience. And individuals who spend less than his income would be better equipped to manage his financial needs and requirements as well.
• An individual who is able to manage his monthly bills by making timely complete payments, exhibits his capability of dealing with his day to day financial needs and commitments.
• A well-managed stash of liquid finances, such as funds in a savings bank account or a financial deposit, helps an individual stay financially stable in times of abrupt unforeseen circumstances such a car or household repair or even a loss of regular job.
• Just like your liquid finances aid in dealing with sudden financial emergencies, it is also important to invest in long-term assets and savings plans, which involve your funds to be locked in over extended period fo time. Such long-term savings enhance your financial strength and stability in the long run and make you adept at dealing with your future requirements, such as your kid’s education or buying a home.
• An individual should manage his debt load prudently, in order to avoid the hassles of paying late free penalties or becoming loaded with accumulated built-up debts over time. A person, who is able to pay off his debt regularly as and when required, is able to avoid getting over burdened with the repayment requirements.
• Despite the fact that credit rating is not exactly a very well rounded parameter of gauging a person’s financial capabilities, it still stays a significant indicator of how well a person is able to deal with the loans and advances he avails. A good credit score is an indicator of an individual’s ability to access loans and credits on lower interest rates, and also his credibility and capacity to pay them back without defaulting.
• Having an extensive insurance coverage also makes an individual adept at dealing with unexpected financial crisis, such as a health emergency or the death of a family member. This is the only factor which is directly linked to a specific financial instrument.
• An individual who plans ahead of his current financial needs and requirements can be expected to be mindful of his future needs and bent towards building his overall financial strenght in the long run.

 

The CFSI aims at studying the effects of these eight indicators, and their contribution towards creating a comprehensive financial health score of an individual. The financial health analytical tool will aid the financial service providers in determining the requirements of their customers, based on their individual financial management patterns. On the other hand, the individual people will also obtain an all-encompassing insight into their financial condition, and the effects of the financial services they have availed. This approach is sure to wield more credible and in-depth understanding of an individual’s financial capacities, as compared to the credit rating analysis.