Credit scores drop after repaying low-income loans, raising concerns

Many individuals who diligently repaid policy-based loans for low-income earners experienced a significant drop in their credit scores, a trend that defies expectations of score recovery after fulfilling their obligations. An analysis of 219,000 cases of "Sunshine Loans" (햇살론) repaid over 12 months or more revealed that the average credit score fell from 626 at the time of application to 449 upon completion of repayment, a decrease of 177 points.

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Policy financial loans are not given any special disadvantage in credit evaluation just because they are policy financial loans.

Even six months after full repayment, the average score only slightly increased to 463. Over the subsequent two years, the scores hovered around 461-462, indicating a slow recovery. This situation underscores the difficult financial environment faced by policy loan users, who may have taken out additional loans or experienced defaults on other debts during the repayment period.

According to a credit rating agency official, policy loans themselves do not inherently incur special disadvantages in credit scoring. The score decline is more likely attributed to other factors that occurred during the loan's repayment period. While a 5-10 point bonus is given to diligent repayers of policy loans since September 2015, its effect on overall credit score recovery has been limited.

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The policy financial loan users are in a difficult financial environment, such as taking out additional loans or experiencing defaults on other loans during the repayment process.

The slow credit score recovery leads to a 35.3% rate of re-borrowing policy loans after full repayment. This has prompted calls for more robust "credit ladders" to help diligent repayers transition to private financial institutions. The Financial Services Commission plans to promote a "credit build-up" path, starting with loans for preventing illegal private lending, moving to micro-loans for low-income individuals, and then to bank-backed bridging loans. However, the Korea Inclusive Finance Agency (서민금융진흥원) believes the gaps between these stages are too wide, as eligibility for each loan depends on specific income, debt levels, and repayment capacity, not just the fact of having repaid a previous loan.

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We will create a link between credit counseling and financial support so that policy financial loan users do not remain solely within policy finance.