In my earlier articles I have published few articles about the credit report, credit history and how to improve the credit history. This is one of the emerging market in India which will help the financial institutions to strengthen their credit owed to the customers. In simple terms, credit score is points assigned for each customer maintained by the credit rating agency. Here the points reveals the strength of credit history for a customer.
Credit score is calculated using the various data collected from the banks by the agency. In India, CIBIL is the leading credit rating agency and most of the financial institutions use CIBIL to check the customer’s credit worthiness. There are other credit agencies started operations in India, new agencies are still in the phase of collecting the customer data. This article explores the basic concepts behind credit history and segregation of the credit score ranging from 0-1000 points. If you are interested in receiving our future articles, please subscribe here, like our facebook page.
1. Credit Agency
A Credit Bureau or a Credit Agency is a company that collects information about the customers of all the financial institutions. These information is collected from the various sources like Banks, NBFCs and other credit lending companies. Also these agencies would extend their presence on other then financial institutions to collect the data. In India, credit agencies working only with the bank institutions. Credit Agencies can not independently collect the information from the banks, it has to work with banks and if the bank is agreed to share the information, then all the data will be stored with credit agency. It is bank’s responsibility to update the update information to agency once it is registered with the agency. The following are the list of agencies doing operations in India :
- CIBIL – It is the first agency set up its operations in India. Most of the financial institutions in India checks the customer data with this agency. Also RBI approves CIBIL to enter into other areas like telecommunications and insurance in the near future. CIBIL has the records of more than 200 million customers.
- Experian – Not yet started the operations. In process of collecting customer information
- Equifax – Started the operations. In process of collecting customer information (Read: What is Equifax credit score?)
- Highmark – Not yet started the operations. In process of collecting customer information
2. Credit Report
Credit Report is summary of customer information about all the existing and past loans, credit cards, mortgages, student loans and any other loans reported to the credit agencies. The details with credit agencies are only which is reported by the banks. A the term clearly mentions, it is only report for the credits with the financial institutions. It will not have any data about your other operations like savings account or fixed deposit.
- This report also gives the customer’s personal information like PAN number, Passport ID, Voter ID, Data of Birth and contact details.
- As per Section 21 of the CICRA act, 2005 “Any one who applies for the credit facility from the banks, also has the rights to request for the credit information obtained by that bank from the credit agency”. It implies that every customer has the rights to apply for their own credit report from the agency.
- In India, credit agencies are issuing credit report to the custom on basis of their requests. These agencies charge each request based on the amount of details requested by the customers. The fees is vary for each agency. (Read: How to apply credit report online from CIBIL?)
3. Credit Score
Credit Scored is arrived after the detailed statistical analysis of data available with the credit agency. This credit score is calculated only using the information available in your credit report. The actual formula used for calculating this score is now revealed to the customers or anyone else other then the same agency. It is known that, they are using the weightage for each category of credits, duration and repayment history to come with the suitable points.
Lender use your credit score to take the decision on whether approve the application or not. It saves lot of time for the banks and lenders instead of doing their own verification for each customers. In fact, it makes the process much quicker and avoid any loss for the banks by giving loans to the defaulters. If a customer has the score of below safer zone, it is 100% that the application will be rejected. Note that, the application will be rejected everywhere who are using the credit score to approve the loan application.
Credit score will be same across all the agencies. The question is why there are multiple agencies in the market, some agencies may be specialized on some sectors. Also they have to differentiate on the competition by providing the advanced solutions like online application.
- If you are a customer got rejected by the banks for low score, please talk to the agency and get the report. There are occurrences, banks have not updated all your details correctly which may impact your credit score.
- Also take the help from agency to improve your credit score. You have to close the existing loans and avoid any late payments on credit cards.
- Don’t make too much enquiry about the loan products to the banks, that also have significant impact on the credit score.
- Have you obtained your credit score, if not please apply to today with CIBIL. Share your experience in the comments section.
4. Credit Assessment by Financial Institutions
The credit score is between 0-900/1000. It may be vary based upon the credit agency. However, there will be a cut off points to assess a customer if he/she is good applicant to approve the loans. The below picture presents how all the financial institutions use the points to assess a candidate.
- If your points fall between 300-600, it is most likely that your loan application will be rejected. If institution wants to approve the loan application, then it is their risk.
- If your points fall between 601-750, Lender will be happy to process your application and take it forward to the next level of checks on credit risks.
- If your points are 750+, then your loan application will be approved by the lenders on credit risk point of view. It will be taken to the next level of steps to process your application.
5. Factors Impacting your Credit Score
There are numerous factors impacting your credit score. It can be largely classified as:
- Credit History: It is one of the important factor contributing to the credit score. In fact credit history is the major role on calculating the credit score. You have to maintain a good habit of repaying the dues on time, if you have filed to repay your debts on time, it impact as negative mark and reduce your points. It is always good idea to follow the steps for improving your credit history. Some of the points are:
Always pay your bills on time. Late payments are viewed as the negative guidance on your financial status.
Also have the mix of credits like loans, credit cards, etc. For example, having multiple credit cards for one person doesn’t look for your financial status. Even if you have multiple cards, use only one card will show that you don;t depend on multiple credit cards.
If you paying the loans through EMI, don’t miss any of the EMI. It is advisable to auto-deduct from the bank account (nowadays this method only used by each loan). Keep checking that you have enough money in the bank account to pay the monthly EMI. If the EMI is returned, it will adversely affect your reputation with the bank and reflect in the credit history.
- Current Debt: What is your current debt would have impact on the credit score. If you have multiple credit cards and loan accounts, it shows that you are running your daily needs with huge liabilities. Which is huge risk for a lender to offer any new loans. You have to maintain the total debt within your comfortable limit.
- Age of Credit Account: Age of credit account is another factor influencing the score. However, it will not have huge negative mark if repayments are on time.
- Type of Credit Account: There are multiple categories on the loan account. Naming few, Jewell loan, mortgage loan, home loans, personal loan, credit cards, etc. Each category has its own risk. Personal Loans and Credit Cards will be considered as the expensive debts. If you are using credit cards extensively, it will reduce your score.
That’s it, I hope the above information must be very useful to improve your knowledge on credit scores. To be honest, if you are not aware of this terminology, you have to look at it to avoid any issues in future. Share your experience with these agencies here. Do you think that these scores would make any value to the system or just another usual business tactics by the banks?. Share your view with us. More over, I have listed down some of the great resources talking about these in the internet.