Credit ratings are fast becoming a part of everyday life for the 16 million Shanghai residents of the nation's economic hub.

Edison Zhang, a Shanghai University senior applying for a government job is a good example of this. Once, he was so worried that a missed monthly payment to Shanghai Telecom for his ADSL service could affect his credit rating, definitely disqualifying him from employment in the civil service.

He spent many sleepless nights before he was told by friends that he could check his credit rating at the Shanghai Credit Information Services (CIS), which he did, finding to his relief that his record was clean.

"Now I know that my credit rating is one of my most valuable assets," Zhang says. "I need it to get a credit card, mortgage loan or any consumer credit," he says.

He is not alone. Many people in Shanghai have become increasingly aware of the fact that their credit ratings can have a direct impact on their lives. CIS has issued a total of 840,000 individual credit information reports since 1999, according to the Municipal Information Commission.

The commission announced on February 9 that the CIS-established Joint Individual Credit Service System Data Collection and Credit Report Query Sub-System has collected information on more than 3.7 million Shanghai residents.

Shanghai was selected by the central government to pilot the credit system experiment, part of the nation's move to speed up the construction of its credit system.

Beijing and Shenzhen were also being considered for the pilot project, according to experts. But they were not chosen because the market conditions in the two cities were not considered to be mature enough for such a test.

CIS was established in 1999 with the aid of the Shanghai Informatization Commission and the some public agencies in the municipality. CIS completed the construction of the information collecting system in 2001, and it has been in operation ever since.

Meanwhile, Shenzhen is understood to have begun building its own credit information system and the establishment of a similar system in Beijing, a government priority, is expected to begin in the first half of 2004.

But CIS remains the only company engaged in the business of collecting both individual and company credit information so far, says Zhou Weidong, the commission's secretary-general.

A local regulation was introduced last month to help protect the individual privacy during the credit information collecting process.

The regulation prohibits the collection of personal information such as nationality, religious affiliation, political beliefs and medical history. It also prohibits the linking of such information to a person's credit status.

CIS General Manager Chen Zhiguo says Shanghai was chosen as the first place to conduct the pilot because of its more dynamic financial sectors compared to either Beijing or Shenzhen.

Latest statistics show that an average of over 100,000 individual credit reports are retrieved by banks and financial institutions on a daily basis, an enormous increase compared to when the system was established in 2001.

Initially, very few people knew they could check their own credit ratings, says CIS employee Yu Wenqian. "The process was a mystery to most people," he says.

"It was an entirely new experience," he adds.

Not anymore. As more people are applying for credit cards, making requesting credit rating checks has become commonplace. Most banks require credit card applicants to present their CIS personal credit reports.

CIS started to set up the Joint Individual Credit Service System based on a platform combining the information provided by the 26 domestic and foreign commercial banks and other financial institutes, as well as the local governmental administrative departments responsible for the supply of electricity, water, gas and telecommunications services in 1999, Yu explains.

The credit score, or risk point system, is computed from the individual's payment records, which may include loan repayments and utility charges.

Yu says individuals scores range from -600 to 1,700, and the higher the score, the better the credit rating.

The scores are for banks' reference purposes. Each bank may decide on its own what standard to apply in considering loan and credit card applications. According to international practice, a credit rating of between 300 to 900 is considered adequate for application for loans or credit cards. As a general rule, risk points are seen as an indication of the level of risk to a bank in the case of payment arrears.

For example, a bank does not normally have to verify the creditability of a loan applicant with a score of 680 or above. But it may require a further verification of applicant's credit worthiness when the score is at, maybe 630. At the other end of the spectrum, banks usually offer more favorable terms to borrowers with credit scores of 740 or above.

The reason why banks place such a great emphasis on scores is simple. Statistics show that there is a one-in-eight chance of defaulting by borrowers with risk points below 600. However, the chances of defaulting by borrowers with scores of over 800 falls to below one-in-1,300, according to CIS analysis.

Yu added that the 26 commercial banks and financial institutions have jointly provide their customer information to CIS, therefore CIS will only charge them 5 yuan (US$0.6) for each report on an individual. But when an individual requests a report, CIS will ask for a 30 yuan (US$3.6) payment.

David Chu, the CEO of Shanghai Pudong Development Bank's Credit Card Center, thinks Shanghai has already set up a credit information system in its real sense.

He added: "The credit card business sector is growing very rapidly and we find the credit information offered by CIS very helpful. Our company will buy more services from CIS in the near future."

Seven-year stain

CIS also revealed that negative information in the credit report, often dubbed as "credit stain" will usually be retained for seven years.

Chen Zhiguo, the general manager of the CIS, added that the time limit of "credit stain" depends on its severity, and must be in accordance with the preservation period of the information provider.

The maximum limit is also 7 years according to international practices.

But occasionally defaulting on public utility payments, such as electricity or water bills, would not be considered a "credit stain," Yu explained.

But she added that "credit stains" have certain effect on an individual's credit status, but this will not last forever.

CIS updates individual credit information on a monthly basis.

(China Daily March 8, 2004)