Ever thought about what exactly is Credit score? Credit score is a number that determines a person’s trustworthiness as a customer taking credit from the bank. It is a three digit number between 300 to 900. The higher the number, the more an individual’s credit worthiness. Credit score is the key factor that helps in determining if you will get a loan or not.
A high credit score means that you have been a responsible borrower and have paid all you loans (and other forms of credits) on time. In order to make you understand better, we will give you an example. Whenever you order food from a restaurant on Swiggy or Zomato, do you check the ratings? I am guessing all of us do. Nobody wants to eat from a restaurant with a bad rating. Food hygiene or quality, whatever might be the reason – it’s just not worth it if you fall sick! This is the same thing with credit score.
A low score implies that you are not a responsible borrower and have not been able to pay back your loans on time. Thus, a low credit score means that any bank won’t be willing to give you a loan easily because they will always be skeptical of your paying back potential.
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Companies that calculate credit score
There are four famous Credit Information companies that help in computing credit score. Experian, CIBIL TransUnion, Equifax and High Mark are the four RBI approved companies that help in credit score calculation in India. Let’s talk about the four in detail:
Experian PLC: Experian Public limited company is one of the “Big Three” giants that report credit scores all over the world. The company has headquarters in the USA, Brazil and London and is based in Dublin, Ireland. The company employs over sixteen thousand people and made a revenue of USD 4 billion as reported in 2018.
The company not only reports credit scores but also sells decision analytics and marketing assistance to businesses that include individual fingerprinting and targeting.
CIBIL TransUnion: CIBIL TransUnion is a credit information company that operates in India. It is one of the four bureaus operating in India as a part of TransUnion which is an American multinational group. The company offers its customers a CIBIL report which delivers them their credit score.
The Indian branch of the company was founded in Mumbai in 2000. The company currently maintains files on 600 million individuals and 32 million businesses.
Equifax: Equifax is the third link of the “Big Three” credit information companies. The company has information of over 800 millions of people and helps in evaluating credit score in over 20 countries all across the world. Along with an earning of US $3.1 billion in annual revenue, the company is also traded on the New York Stock Exchange or NYSE under the symbol EFX.
Along with offering credit and demographic data and services to business, Equifax also sells out fraud-prevention and credit monitoring services directly to consumers.
CRIF High Mark: CRIF High Mark is another credit information company that works in India. Approved by RBI, the company was incorporated started in 2005 in Mumbai. The company covers nearly 38 crore unique borrowers and has a database of 120+ crore people as reported in 2018.
The company works with Sebi-registered brokers, telecom services and credit card rating agencies. Along with all this, CRIF High Mark also serves retail, MSME, agriculture, commercial and microfinance.
These companies are used by Indian banks in order to get the credit report. The exact steps involved in the whole process are as follows:
- Any transaction made by a user that affects his/her credit score is of great importance to the bank and all the credit score computing companies. The information is then sent to the credit score companies.
- The regulations as made by RBI mandate the distribution of information to all 4 credit bureaus. This information transfer has to be done very quickly so that these bureaus remain up to date with whatever monetary transaction you are making.
- After this, the credit bureaus becomes busy with collecting complete information about your banking habits from all other institutions and give back a credit report.It is important to understand that the credit reports given by all four agencies is the same. Your credit report is a mark sheet which talks about your monetary expenses and obviously your credit score.
All the four agencies – Experian, CIBIL TransUnion, Equifax and High Mark calculate a different credit score value. The internal process of calculating the score may differ from company to company therefore the results will never be the same. All the four bureaus have their own importance and a unique set of results for the users.
Credit score range
Credit score of an individual can be anywhere between 300 and 900. A low score means bad reputation and no lenders willing to give you money. Higher credit score means efficiency on the borrower’s end. The following is the list of various results your credit report may show:
NA/NH: A person with no credit history in the bank will have a NA( Not Applicable)/NH (No History).
300-579: This range of credit score is considered to be quite poor. Lenders refuse to give loans to such borrowers. Such a low score can be a result of bankruptcy or other big credit issues. The only way such people can get a loan is by keeping some kind of a collateral as loan security.
580-669: A credit score in this range is considered to be an average score. These people can get a loan but they will have to pay a significant amount of interest, more than what another person with a good credit score would pay for the same loan.
670-739: This range of credit score is considered to be good. This is the range where people can easily get a loan at a somewhat good interest rate but necessarily not the best.
740-900: With a credit score in this range, any lender will be ready to give a loan at the best interest rate. These people form the creamy layer of all borrowers. These individuals get loans easily and that’s why it is advised to keep your score in this range.
Reasons for a bad credit score
There can be multiple reasons due to which one can have a bad credit score. Some of them could be:
- Credit score falls down when you fail to pay your loan dues on time. That being said, it will obviously fall down even more when you forget or ignore paying your bills. Banks do have a type of customers they like and they are those who pay all your dues on time thus, it is important to keep in check your repayment habits.
- Creditors put penalties on your account when you fail to pay your bills on time. Not paying bills on time is obviously not a good indicator and takes down your credit score by notches.
- If you file for bankruptcy then that takes a heavy toll on your credit score and it declines.
- Applying for too many loans over a short period of time reflects badly on your credit score. This makes the creditor skeptical of your financial stability and pay back ability.
- If you close an old credit card and there is a scenario of dispute settlement over the past bills, it reflects badly on your credit score.
- If you close a credit card that has some outstanding balance then that means that the credit limit you have will drop to Rs. 0. This means a fall in your credit score.
Making inquiries about credit score
“Will my credit score get affected?” A lot of people have this question in mind when inquiring about their credit score. The answer to this depends on whether a hard inquiry has been made or a soft one. There is a major difference between a soft inquiry and a hard inquiry.
Soft inquiry: A soft inquiry is the one made by an individual. It simply means that if you happen to make an inquiry about your own credit score, we can tell you that your credit score won’t be affected for sure.
Hard inquiry: A hard inquiry is the one made by a bank or a lender when an individual applies for a loan in any of those institutions. Whenever a person applies for a loan, the bank/lender will inquire about his/her credit score. Every hard inquiry means a dip in the score.
Credit score calculation
The calculation of credit score depends on multiple factors – your credit history, credit exposure, age of credit and the total type of accounts. Let’s talk about them in detail:
Credit exposure: This phrase is used to describe the credit utilisation ratio. basically, the ratio between the amount spent and the total credit limit forms the credit exposure. It is suggested to ideally use 35-40% of your credit limit.
This helps in maintaining the ratio on a lower scale which is a good sign as the banks think that you have handled your finances responsibly. A customer who can manage his finances is obviously a very attractive potential loanee for any bank.
Payment history: A borrower should be able to pay the EMI of his loans on time. Along with that, he/she should be able to pay his credit card dues and other related dues in a timely manner. If you fail to pay your dues on time, your credit score falls.
This fall in credit score means that you won’t be able to get a good interest rate while taking loans. The higher the fall, the bleaker the prospects of your getting the loan. So, it is advisable to pay all your credit card dues and loan dues on time so that you can have a good credit score.
Type of accounts: It is recommended that as a customer, you should have multiple types of credit accounts. You should have a mixed credit history with both secured and unsecured loans.
The reason for that is that it helps in creating your credibility as a customer with the bank. As a customer who has dealt with different types of credits, you can easily make for a good loanee for any bank/lender.
Duration of credit: The time duration of your credit history speaks tons about your paying back behavior. Having a good credit history over a period of years makes you a reliable customer as it shows that you are sincere borrower who knows how to manage money.
Don’t close your old credit cards as their credit history might bring you bonus points when it comes to getting a loan. The downside to this is that just in case you decide to close an old card, it reflects badly on your credit score as it falls.
Hard inquiries: Hard inquiries in your name also affect your credit score. If any bank/lending institution where you have applied for loan checks out your credit score, your score is bound to fall by a few notches.
Make sure that you don’t apply for multiple loans over a short period of time with multiple lenders. This could result in a consistent check of your credit score over a short span which means a sudden dip in your credit report.
Credit report
Credit report is basically an amalgamation of a person’s credit score and all his credit history. All the 4 agencies calculate your credit report in accordance with your credit history and score. This report is used by all banks in determining whether to give a loan to an individual or not. The exact rate of interest at which a bank will give the loan is also decided by the credit report.
Process to get a credit report
In order to obtain a credit report, you can use various online/offline mediums. The Credit Information companies have their own websites that can help you in getting your credit report. Along with the actual CIC’s, there are various websites that have tie-ups with the CIC’s that can help in getting a credit report.
Obtaining a credit report online is simple. The following are the details you need to fill online – name, gender, email id, date of birth, residential address, PAN card details.
If you file for a credit report offline, the process becomes more elaborate. You have to download the form for filing the credit report from any of the credit information companies. The form needs to be filled with details like your name, date of birth and other personal details. Then, you are required to self attest a copy of your proof of identity which could be anything ranging from your driver’s license to PAN and scan it.
Enclose a demand draft along with the above documents in an envelope and mail it to the respective CIC. Then, you will have to wait for the CIC to send you a mail back once they are through with the calculation process from their end.
It is important to understand that getting the online report is a much safer, easier and faster alternative as it saves you the trouble of having to manually do the printing/mailing. So, these are two ways by which you can get your credit report done.
Information included in the credit report
Your credit report is a comprehensive, all-encompassing document. It covers everything ranging from our credit history over all the past years to the number of hard inquiries that have been made in your name. After all, it is the most important document when it comes to debt/loan approvals.
The details covered in your credit report include:
- Name, date of birth, gender and other personal details.
- Earnings and other details related to your employment.
- Loan defaults and payment history. Details of any loan that you currently have are also included.
- Total credit limit and history(amount you have spent before and repayment).
- Hard inquiries made under your name by various banks and financial institutions.
- Most importantly, the credit score you have.
On the financial front, your credit score and credit report are two very important parts. Having a good credit report, endears you to every bank and makes you a very creditworthy loanee. So be a responsible borrower, pay back your loans on time and practice good financial etiquette.
