ATM :: 3 basic questions about credit scores

Rajiv Raj, Director & Co-Founder of CreditVidya. | 07-01-15 | Morning Star


In the world of finance, credit plays an important role in meeting our wishes. Be it the dream of owning a car or a house of one’s own or simply making improvements in your house. You name it and it gets realised with the help of credit from various financial institutions. Even owning an expensive smart phone has been possible for most due to availability to cheap and easy credit. But getting loans easily is not true anymore. Lenders no more look at your earning capacity alone but also factor in your past repayment track record in the form of a credit score before making any kind of decision. In such a scenario associating one’s name with a bad credit score may prove to be disastrous.

How do banks and lenders decide on whether or not to sanction a loan?

Credit score takes into account the credit history of the individual and predicts his willingness to repay the loan on time. Banks and lenders evaluate customers based on their ability and willingness to pay. Ability is your pay cheque, while willingness is your credit report and score. A higher score implies better chances of getting credit from the lenders.

Having said that, it is up to individual lenders to decide their acceptable level of risk. Depending on their risk appetite, they decide their credit score cut-off for accepting a customer’s loan application. Also, what may be considered as a bad credit by one lender may be perfectly acceptable to another. So a loan approval by one lender might require the minimum score to be 750, another might settle for 700 or even lower. So if one lender does not accept your application on the basis of your credit score, don’t give up. Approach others. But bear in mind that lenders offering loans at lower credit scores generally offer loans at a higher rate of interest. Hence a lower credit score may still get you a loan but it could work out to be a costly affair.

How many credit bureaus are there?

When it comes to credit score, the CIBIL score is what comes to mind. In reality, there are other three credit bureaus in the country. Apart from Credit Information Bureau of India Ltd., or CIBIL, there is Equifax, Experian and Crif High Mark. As of now, almost all of them provide scores ranging from 300 to 900. But the fee to access the credit scores differs across bureaus. For instance, to access a CIBIL report and score, you will have to dish out Rs 470, but only Rs 400 for the same from Equifax. The latter also provides an option of accessing its credit report four times a year for a payment of Rs 1,000. Experian, on the other hand, makes the credit report available at just Rs 138. The payment options range from demand draft to NEFT, which is the online bank payment.

Does an individual need the score from more than one bureau?

At present, the lenders report the credit history of their customers to all the four credit bureaus but access only the CIBIL report to make the decision. That’s because the bureau was launched in 2004 and has credit data on individuals from then on. The others started operations only in 2010. This could change in the future as lenders start accessing credit scores from more than two credit bureaus to make their decision regarding loan approval. Therefore, it is important to access your credit score from multiple bureaus. If your credit score is high across different bureaus, it will act as a double confirmation that you are a disciplined and a good customer and, therefore, worthy of a loan at an attractive rate of interest.

In case you do come across any discrepancies in the reports generated by the credit bureaus, you can raise a dispute resolution with them.

As the new year begins, get hold of your credit score from all credit bureaus. It will help you in the long run and prevent you from dealing with end moment rejection from lenders.

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