Credit Score

Credit Score –
You have a vague idea that it's a number which banks inspect to determine your credibility. But do you know who calculates your Credit Score and what factors determine it ?
Well, this article will answer all your questions about Credit Score and all its ramifications.

What is Credit Score?
A Credit Score is a three-digit number indicative of your credit behavior. Consider it marks given to you by financial institutions for your financial behavior. A high score means you have good money-management skills and that you repay your debts on time. Likewise, a low score raises questions about your financial credibility.

How does this impact you?

Well, banks always check your Credit Score before processing your loan or any other kind of credit request. A good Credit Score will help you get a loan or credit cards easily. Moreover, you can bargain for better rates of interest on loans if you have a good Credit Score. In a nutshell, your Credit Score tells financial institutions whether they can extend credit to you or not.A good Credit Score means you are a safe bet, and a bad score translates to ‘uh-oh, maybe next time’!

Who computes Credit Score?

Your Credit Score is computed by Credit Information Companies. There are four companies in Indian which do the job– CIBIL TransUnion, Experian, Equifaxand High Mark. Let’s unveil the mystery around how these companies compute your score. When you make a transaction—the one that is elevant to determine your score—banks send details about it to all four credit bureaus. To send details to all credit agencies is a mandate by the RBI. Essentially, banks keep Credit Information Companies up-to-date about your monetary habits.

If a bank needs to check your Credit Score, they can approach any one of the bureaus.

It doesn’t matter which one because all will have the same score for you– all four are equally authoritative and on par with each other. After receiving information from the bank, credit bureaus get down to the task of collecting more information about your financial habits from other banks and financial institutions. The credit bureaus then processes this information to formulate what is called a Credit Report.

What is a Credit Report?

A Credit Report is your financial marks card. It contains your Credit score. It’s wiser to check your score from time to time.

Why should I check my Credit Score?

It is very important that you keep a close eye on your Credit Score. It is the best way to gauge your chances to get a line of credit. Another reason why you should track your score is to know if it dips, or if an error has been made by credit agencies while calculating your score. This will help you make timely amends.

Do the four Credit Agencies compute scores differently?

Though the processes followed to compute your score might differ from agency to agency, your Credit Score calculated by all will be the same. This is because banks intimate the relevant information to all four agencies. herefore, no matter which agency a bank picks to check your Credit Score, there will be no major discrepancy in it. Of the four agencies, CIBIL, however, is the most popular since it was one of the first Credit Information Companies to start operations in India. This has fuelled the notion that CIBIL Score is more accurate than a score from other agencies. This, however, is not true. Banks give equal weightage to scores from all four agencies. Equifax, Experian and High Mark Credit Scores are as good to banks and other Financial institutions as CIBIL Score.

Isn’t CIBIL the deciding factor in a loan?

Though many believe this, it’s not true. All Credit Information Companies, including CIBIL, create your Credit Reports which tell banks about you credibility. second, CIBIL and the other credit agencies do not entertain requests from individuals to make changes to financial details in Credit Reports. Changes are incorporated when banks provide relevant information to these agencies. This ensures that information in your Credit Report is legitimate .After all, your Credit Score is one of the most important factors considered by banks when deciding about your loan or Credit Card application. Your Credit Score also determines the interest rate banks chalk up for you. So make sure that you score big on this one!

If you have a good score, you can be rest assured that your loan or Credit Card application will be processed without any hassle. You can even leverage a good score to ask your lender bank for better rates of interest and additional benefits. On the other hand,seeking credit with a poor score will further lower your score. Let’s not even imagine getting approval for a credit line. Hence, check your Credit Score before you apply for a financial product. Work up the score if it’s not in the acceptable range.

TIP: Credit agencies review and renew your score every few months. If you have a poor Credit Score, start managing your money wisely and pay your dues on time for a good few months 

. Credit agencies will reward you by boosting your score.

Does my Credit Score get impacted if I esquire about it?

It depends on the kind of enquiry being made. There are two types of inquiries – hard and soft enquiry. Hard enquiries send your Credit Score down by a few points, while soft enquiries do not impact your Credit Score. An enquiry made by an individual is called a soft enquiry.

Hence, this will not impact your Credit Score in any manner.

TIP:It’s wiser to check your Credit Score from time to time so that you stay in the know. Always check your Credit Score before applying for a loan/card. You will know whether your

score will tide you over or if it needs fixing.

A hard enquiry is when a financial institution checks your Credit Score to take a decision on your credit application. Every time you apply for a loan or a Credit Card, the lending institution checks your score. Each time a bank checks your score; your score will dip by a few points.

TIP: If you are applying for a loan or a Credit Card, do not apply to many banks at the same time. Too many enquiries will hurt your Credit Score.

I have my score. What do I make of it?

Your Credit Score will be any number between 0 to 900 points. Use this guideline below as your reference to know what your score means.

.Below 300: You are too risky a bet for bankers and other lenders. You do not have a sufficiently big credit history to allow banks to judge your credibility.

.300—449: When we talk about poor Credit Score, we are referring to this range. You cannot afford to miss a payment on your ongoing loans or card bills.

.450—599: Mediocre, at best! Some banks will consider your loan and Credit Card request, not all. You can do better.

.600—749: A score in this range is good, just shy of perfect. Banks will readily give you line of credit.

.750—900: Banks will look at you favourably if your score falls in this range. It speaks volumes about your credibility. A Credit Score in this range will throw open a host of loan and Credit Card offerings for you at attractive rates.

What makes your Credit Score go down?

It is understood that having high balances on your credit cards can significantly reduce your credit score. Apart from that, there are several other factors that can hurt your credit score:

• Being late on your credit payments.

• Completely ignoring your loan dues/credit card bills.

• Creditors charge off accounts when credit card bills are not paid on time. The status of having your account charged off is one of the worst incidents that reflects on your credit score.

• Lenders use third-party debt collectors to retrieve the loan amount from you, in case they do not receive payments

• Having your account sent to collections reflects very poorly on your credit score.

• Filing for bankruptcy can have a devastating effect on your credit score.

• When you request to close a credit card that has an outstanding balance, your credit limit drops to Rs.0.

This is similar to a situation where you have maxed out your credit card.

• Closing old credit cards shortens your credit history. This has a negative impact on your credit score.

• Applying for multiple credit cards or loans within a short duration makes your credit score plunge. Hence, it is advisable to limit the number of applications.

• Having only one type of credit account will negatively impact your credit score. So, you should look to maintain a mix of loans and credit card debts and make

consistent payments on time.

• If you fail to check your credit report occasionally and fix errors, if any, your credit score can be hurt. It should be understood that credit reporting bureaus also make mistakes while creating credit reports. If you do not monitor and correct your report, it may cost you a lot in the future.

Change in Credit Score - how often does it happen?

When you work on improving your credit, you should be very patient, so as to not get discouraged. Credit scores are calculated from your credit report. When you request for the

Score from multiple credit reporting bureaus, you may see a slight variance in the figures. This is fine, as long as the difference is not massive.

In order to understand how your credit score changes over time, you should know how often there will be updates to your credit report.

Lenders/creditors usually report your credit information (both positive and negative) to credit bureaus once a month. So, technically your credit scores can change a little each month, based on the information that is updated.

How do big fluctuations happen?

Most of the changes in your credit score happen incrementally .Although you would not see changes instantly, over a period of time this can add up to a considerable amount.However,

there are certain factors that could instantly have a huge negative impact on your score. This includes a delinquency, i.e., a significantly late payment such as a 30-day delay on a credit.

Another big influence is the credit utilization ratio.

This refers to the amount you owe as debt as opposed to your credit limit. So, an increase in credit card debt will cause your credit utilization ratio to rise, which in turn drops your credit score. Consider another scenario in which you pay off all your credit card debts in one go. Your credit utilization ratio will fall in this case. This would lead to a temporary hike in your credit score.

How does the Credit Score affect you?

A bank or lender would check your credit score or report to review your credit management skills, based on the review, a lender may or may not give you a credit. It is advisable to keep an eye on the credit score before applying for a credit card or loan. If you have a poor credit score and you keep applying for credit, every reject will further lower your score.

A good credit score will empower you with the ability to negotiate the interest rates. The banks or lender would like to offer a credit line to someone with a better credit score.

Calculation of Credit Score

As per Reserve Bank of India (RBI), every financial institution is expected to send financial data of any individual on a monthly basis to credit bureaus. Currently, there are four credit bureaus in India including CIBIL, Experian, Equifax, High Mark. The credit bureaus collect financial data that is useful for the credit score/report. All the four credit bureaus use a similar method for calculating the credit score, no matter from which bureau you’re receiving the score, it will have the importance as the other.

Based on the information from your credit history, such as details of a loan, credit card, and the payment habits,the credit bureaus will calculate a credit score that will indicate your financial credibility.

The following factors will be considered in the calculation of your credit score:

• Credit card utilization

• Payment history

• Age of credit lines

• Total number of accounts

• Entries for credit inquiries, and

• Negative status account

Monitoring your Credit Score

The credit score is updated on a monthly basis based on the relevant information provided by financial institutions. It is advisable to keep an eye on the credit score to determine your financial credibility while applying for a loan or a credit card. It will help you in avoiding the situation where your credit applications are getting rejected due to a poor score. By monitoring the score on a regular basis will help in identifying mistakes and correcting errors before they are too late.

Soft vs. Hard credit inquiry

When you are obtaining your credit score or report, it is considered to be a soft inquiry and it doesn't have any adverse impact on your score. When the bank or lender inquiries for a credit report, it is referred to as hard inquiry and it can reduce your score. You can be rest assured

that your credit score won't get impacted due to soft inquiries.

What are Credit Reports?

Credit reports are a summary of an individual's credit history. The report contains details of the credit and loan history along with other basic details. Most lenders (banks) use the credit reports in making effective lending decisions. In a credit report, you will find information related to all types of loans and credit account, the report will also contain details such as the name, date of birth, PAN card number,address, etc. You can also find details related to the last credit report check performed by a lender. In India, there are four major credit information companies (CIC)) that provides credit reports of individuals. Some of the CIC offer a free credit score check while the other don't, however, lender pay a fee while obtaining a credit report of an individual. When an individual applies for a loan or a credit card, the bank will review their credit report before approving the loan/credit.

The CICs collect the individual's information from financial institutions such as banks as well as government agencies such as the Income Tax Department. These reports help the lenders in minimizing repayment defaults by avoiding individuals with a bad credit history. Though the banks are not solely relying on these credit reports to give out loans/credit, these reports play a crucial role in the calculation of eligibility.

The following CICs gather individuals financial information to prepare credit reports in India:

• TransUnion CIBIL Limited: (earlier known as-Credit Information Bureau (India) Limited) is the first Credit Information Company (CIC) of India that was founded in August 2000. The company collects and maintains records of an individual’s repayment habits related to loans and credit cards. These records are sent to TransUnion CIBIL Limited by the member banks and financial institutions on a monthly basis. The information received from these establishments are used to create Credit Information Reports (CIR) and credit scores. These reports and credit scores are provided to lending institutions such as banks in order to help them make lending decisions.

• Experian Credit Information Company of India Private Limited:With headquarters in Dublin, Republic of Ireland, Experian uses its own methods of calculation to create credit reports. The credit report from Experian has information of an individual's credit and loan history that are bought as credit reports by various banks in India. Similar to TransUnion CIBIL Limited, Experian collect information from the member banks and other establishments. The lenders are required to pay a fee to obtain credit reports from Experian.

• Equifax Credit Information Services Private Limited (ECIS):One of the oldest credit information companies of USA, Equifax is also the largest credit reporting agency in the US. Headquartered in Atlanta, Equifax provides credit reports for individuals as well as businesses.

Equifax has tied up with various banks and institutions in India that help the company in creating credit reports and assessing credit scores.

• CRIF High Mark: Considered to be one of the few credit information company that specializes in analytics, scoring, and credit management solutions. CRIF High Mark creates credit reports based on the information collected from banks, Income Tax Department, and other banking as

well as non-banking companies. The credit reports from CRIF High Mark are available against a fee. There are many Indian banks who have tied up with CRIF High Mark to create reports and to assess their borrower's financial credibility.

What are credit reports used for?

The CICs will evaluate an individual's credit history to calculate a score that represents the individual's credit worthiness. Each CIC has their own method of assigning the score, however, a high score will indicate a healthy credit score while a low score can decrease the chances of loan application approvals. Most of the CICs will provide you with a free credit score while a fee is charged towards the credit reports.

Why Credit Reports are used?

The credit reports are used by lenders such as banks to determine the repayment capability of loan/credit seeker. The credit report provides a useful insight into understating an applicant's past credit repayment behavior. A credit report will also contain information related to late or missed payments that can adversely affect your credit score. When an applicant applies for a loan/credit, the lending institution will look into the credit report to determine whether you will be able to repay the loan amount. There can be various reasons for obtaining a credit report,

such as:

• Determining creditworthiness

• Reviewing missed/late payments

• Checking the credit score

• To analyze all credit and loan accounts under one platform

• Reporting errors on the report

• Making effective landing decisions, etc.

You can refer to any CIC's website to check whether you can purchase a quick credit report of yourself. These reports will help you in keeping a close tab on your credit score that can be useful while applying for any type of loan/credit

• Reviewing the credit report periodically will also enable you to report any incorrect entries/information. If you are planning to apply for a loan/credit card, it is essential to make sure that you have a healthy credit score and report so the chances of loan application approval are higher.

The application process for obtaining your Credit Report Most CICs offer credit reports through online and offline mediums. The individual will require producing of required details and make a payment to get his/her credit report.

The following documents and details are required for obtaining a credit report online:

• Name

• Date of birth

• Address

• PAN card number

• Identity authentication
The following documents and details are required for obtaining a credit report offline:

• Visit the CIC's site to download and fill out the form requesting for your credit report Self-attested and scanned copy of any of the Proof of Identity (PoI) such as PAN Card, Driving License, etc.

• Enclose a Demand Draft (DD) that is payable to the relevant CIC for the required fee

• Mail the documents along with the DD to the address mentioned on the CIC's website The online process will be quicker compared to the offline method, however, you can track the status of your credit report for free. The CIC will typically email the password-protected credit report to the individual when the credit report is requested through the online facility. In the case of offline application, the credit report will be sent through postal/ courier services.

What is the difference between a Credit Score, Credit Rating, and a Credit Report?

Most often, the term credit score, credit rating, and credit reports are confused with the meaning of the other term. However, the following list should help you in understanding each of the terms:

• A credit score is a three-digit numerical representation of your financial credibility that can vary from a score of 300 to 900 while the credit rating is referred to the scores that are assigned to businesses and companies. The credit reports contain a detailed overview of your

credit history based on your past credit and loan details.

• A credit score or credit rating can change on a monthly basis based on the information provided by banks and non-banking financial companies (NFCs), if there are any changes, however, the information stored on your credit report stays for many years.

• Credit score is numerical while the credit ratings are indicated in ratings such as A, A+, etc.

• Few of the CICs offer free credit scores and ratings, however, credit reports are chargeable.

Credit Report and Credit Score - how do these differ?

When you apply for credit, the lender will assess two metrics that helps them take a decision on your creditworthiness. These are your credit score and credit report. For a better understanding of these factors, we have differentiated them in the table below:

Your credit report has information on the current and past credit agreements that you hold. These include mortgages, credit card accounts, student loans, and inquiries on your credit history.

A credit score is similar to a grade that is provided to your credit report. It is a 3-digit number that usually ranges from 300 to 900.

The credit report is a reflection of your credit management, and you have control over the listings there. The credit reporting bureau assigns you the credit score based on your credit history. The credit report gives an outline on how much you owe your creditors over an extended period of time, whether you have been making payments consistently, and for how long each account was open. The report also lists associated public records against you, such as court judgements, bankruptcy filings,etc.

A high credit score indicates that you are a low risk borrower, making you more likely to qualify for a loan. In order to access your credit report, you can get in touch with credit reporting agencies or use a credit monitoring service that offers you this information.

Your credit score is a part of the exhaustive credit report that you receive from the credit bureau.

Importance of Credit Reports for companies and businesses

Similar to individual credit reports, the CICs prepare credit reports and assign credit ratings to businesses and all other types of firms. The credit report for businesses is closely reviewed by suppliers and government agencies while providing utility and business contracts. In fact, business and companies are required to provide their credit rating while applying for electricity, gas connection, phone,internet, and various other types of services. The credit reports also help businesses in managing market risk by carefully choosing their suppliers and business partners. The credit report enables the reviewing company to make business decisions with confidence.

The credit reports for businesses provide information related to the establishment, wners/directors, employees, profit and loss, liability, assets, pending court cases (if any), and various other details. These type of credit reports can be expensive based on the amount and type of information it offers.

Understanding the Credit Reports through key terms

If you are going through the credit report for the first time, the information and technical terms can turn out to be a little overwhelming. There are various acronyms that can sound similar to other terms, however, the following list will help you in knowing few of the key terms:

NA or NH: If you never owned a credit card or took a loan, there are chances that you will see an NA or NH on your credit score. NA or NH indicates that are there no, little, or insufficient credit activity to create a report or to generate a credit score.

STD: Applicable to an individual's credit report where the payments are made with the due dates.

SMA: Applicable on a credit report when the borrower has delayed the repayments.

DBT: This indicates a doubtful situation where the credit information has been inactive for over 12 months.

LSS: A credit report can be remarked as LSS if a lender reported the loan/credit card account as loss or if the account remains as a defaulter for a longer period of time.

DPD: Days past due (DPD) indicates the number of days that the account has not received a payment. 

Written Off/Settled Status: In a situation where the borrower could not make the repayment but came to an agreement with the lender for either a repayment plan or a settlement will indicate a written off or settle status.

Reading a Credit Report
A Credit report is a detailed account of a person's credit history. The credit report will include details of your credit accounts, like, Credit Cards, Auto loans, Home loans and any other form of credit availed from a registered lender. The credit report will also include details like payment, history, credit limit and account balance, opening date of credit, status of loans (close or open, paid in full, not paid in full).