ATM :: Decoder: How credit information firms calculate credit score

By Harshala Chandorkar | Jan 16, 2014 |


Today almost no loan or credit card application gets approved without checking the applicant’s credit report and score. Ever wondered how a person’s credit score is calculated? Here’s a quick glimpse into what goes into the making of a person’s credit score:

What is a credit score?

Credit information companies like CIBIL calculates an individual’s credit score through advanced analytics and assigns a number between 300 and 900 to a borrower, based on his/her credit history. The closer your score to 900, the more confidence the credit institution will have in your ability to repay the loan and hence, the better the chances of your application getting approved. While each bank will have its own credit scoring cut-off based on the credit sanctioning policies, it has been observed that most banks are lending to consumers with a credit score of 750 and above.

How is the score calculated?

While each credit information company has its own proprietary algorithm to calculate an individual’s credit score, the most important elements of the score composition are centric around the loan payment behaviour of the individual.

The score is calculated based on the following factors:

Credit utilisation: How much credit is the consumer using?
Defaulting: How many accounts are past due and by how many days?
Trade attributes: How old are this consumer’s lines of credit? What type of credit does he have? Does the consumer have a good mix or balance of credit or is it all credit cards?
Number of enquiries: Has the consumer applied for additional credit lines?

Here is a breakup of the various factors that impact the credit score:

1. Past performance: Individuals past performance on their debt obligations is the most important criterion and contributes approximately 30% weightage to the score
2. Credit type & duration: Type of loan availed whether secured or unsecured loan, and the duration of credit history established contributes an additional 25% to the score.
3. Leverage: The total amount of credit exposure contributes another 25%
4. Other factors: Other factors such as credit utilization, recent behavior contribute the remaining 20% to the score.

Your credit report and score not only determines whether or not you qualify for a loan, but it may also have an impact on the terms and conditions on which you can avail the loan. The higher the credit score, the better your chances of availing the loan faster and on favourable terms. It is advisable to check your credit report before applying for a loan. Timely payments of loan EMIs is most important for maintaining a good credit history and a healthy credit score!

The author is senior vice-president – consumer relations, CIBIL.


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