Credit Reports in India and their Importance in Loan Approvals

If you want to step into the world of loans and personal finance, you ought to be familiar with the term credit score. It is a three-digit number lenders use to check person's creditworthiness. The higher the credit scores, the better the creditworthiness. It increases the chances of approval for giving a loan. Hence, a credit score is a borrower's credit report grade. By going through the credit score report, a lender can decide whether to offer credit to the borrower or not. In this blog, you will learn about the meaning of a credit score, its types, and the factors impacting it. We will also discuss some key terms used in a credit report score. Keep reading ahead for more knowledge.

Did you know? Two statisticians founded FICO, a credit score in the 1950s. However, it took quite some time for FICO to become a crucial part of lending. So, credit scores did not exist until the 1950s!

What is a Credit Score Report?

A credit score is a measure to help lenders measure the Financial stability of a borrower. It gives an overall idea of the borrower's ability to repay their debts responsibly. The credit bureaus in the country calculate these scores after considering factors such as credit history and the current credit activities of the borrower. Lender companies decide whether to offer credit cards, auto loans, or other credit products based on the applicant's Credit score. Hence, a credit score plays a crucial role in a lender's decision to provide credit. 

The Credit Information Bureau( India) Limited is a credit bureau that calculates the borrower's credit score. CIBIL Limited is the oldest credit bureau in the country. There are others who prepare and provide the borrower's credit score report, such as Equifax, Experian, and CRIF High Mark.

Also Read: Get Personal Loan For Low CIBIL Score: Learn How

Types of Credit Score Range

The Reserve Bank Of India (RBI) has authorised four credit information companies to prepare credit score reports for Lenders’ use. The purpose of these companies is to analyse the financial transactions of businesses and people. These transactions include the credit cards used, the loans taken and the overdraft facilities, etc.

The credit bureaus in India are

• TransUnion Credit Information Bureau( India) Limited or CIBIL
• Equifax
• Experian
• CRIF Highmark

The score range of these bureaus are as follows:

•  CIBIL Score Range- It summarises past credit behaviour from Inquiries and Account details on the Credit Report. The credit score ranges between 300 and 900, where 750 and above is a good score. Delayed payments and multiple inquiries reduce the CIBIL score. A cibil score range below 750 makes it tough to avail of loans from Banks and NBFC. CIBIL considers the following while calculating the credit score- new credits, duration, and repayment history.
• Equifax Score Range- This credit rating agency came into existence in 1899 as a credit rating company with a license to operate in 2010. The credit score for Equifax ranges between 1 to 999. This bureau also provides portfolio scores for individuals. They offer organisations risk management reports, industry diagnosis, and credit fraud reports.
•  Experian Score Range- The credit score rating for Experian ranges between 300 and 900. A higher credit score means a higher chance that the Applicant will be able to repay the loan in time. It even leads to lower down payments and interest rates by the borrower.
• CRIF Highmark Score Range- Even though established in 2007, this full-service credit rating agency obtained its license in 2010. Its credit score rating falls between 300 to 850. 

Banks and Financial Institutions enquire with these licensed credit bureaus to obtain a condensed credit score report of the borrower. It helps them evaluate a borrower's credit history. Lenders check the credit score of each applicant before giving a loan. 

Also Read: Equifax Credit Score and Credit Report Explained in Detail

Why Does the CIBIL Score Matter?

CIBIL score is the most popular credit score in India. These scores are known as the CIBIL Transunion scores in India. People use the terms CIBIL Score and Credit Score interchangeably. It is a three-digit credit score regarding the borrower that appears on his credit report. As mentioned earlier, this score ranges between 300 to 900. The CIBIL Score works as a first impression for the lender. The higher the score, the more worthy the borrower of receiving the credit. This score plays a vital role in the loan application process. A lender bank or financial institution first checks a prospective borrower's CIBIL Score and Report and then decides on providing the credit. It may not even consider the loan application further if the CIBIL Score is low. Only a high CIBIL Score makes the lender look into the application and determine other details to decide if an applicant is credit-worthy. 

However, the decision to sanction the loan depends on the bank. The CIBIL does not decide this. Usually, the banks consider a score of 700 as ideal. It is a standard benchmark that lenders prefer for any loan.

Ranges of Credit Scores used by Lenders

Different credit bureaus use various scoring models. Usually, credit rating agencies consider a score above 700 as excellent. A score below 650 is either average or bad. It is a Useful report for Banks and lending companies to assess a prospective borrower's repayment behaviour and credit history.

FICO Score

A FICO score is a three-digit number between 300 and 850. The Fair Isaac Corporation developed this score. It decides if the lender should give the loan and how much an Applicant may borrow. FICO is a well-known credit rating agency in the United States. It has released FICO Score for India helping Indian lending institutions with the most accurate consumer credit risk assessment. The top credit agencies in the country predict the Applicant's creditworthiness for determining the FICO Score. The lenders consider FICO scores above 670 to be good. The five credit score categories of FICO are

• Less than 580 - Poor
• Between 580 and 669 - Fair
• Between 670 and 739 - Good
• Between 740 and 799 - Very Good
• Between 800 to 850 - Excellent

Role of Top Credit Information Companies | Process and Benefits

How Do Different Lenders Use Credit Score Reports?

1. Mortgage Lenders- They check credit scores from all four bureaus taking the middle score as the benchmark.

2. Credit Card Providers- They use credit score reports and take only one credit score, usually the middle one.

3. Collection Agencies- They use credit scores to check the probability of the borrower repaying the dues.

4. Car loan Lenders- They use credit scores to determine the applicant's eligibility to avail of loans and their Rates of interest.

5. Insurers- These providers use a separate algorithm to calculate a credit score.

Also Read: What differentiates your credit score from the CIBIL credit rank?

Factors Determining a Credit Score

Credit rating agencies assess the following factors while calculating a credit score:

• Payment history- It makes up for 35% of a credit score, determining if a person can repay his debts on time.
• Total amount owed- This counts for 30% and considers the credit utilisation of a Borrower.
•  Length of credit history- This makes up 15% of a credit score. Lenders consider longer credit histories less risky since they have more data to assess payment behaviour.
• Types of credit- This counts for 10% and checks a Person’s instalment credit mix. It includes mortgage loans, revolving credits, etc.
• New credit- This also counts for 10% of the credit score. It checks the number of Accounts a person has and the new Accounts they have applied.

Conclusion

Lenders, banks, and financial institutions need to check the credit score report before providing a loan to the prospective borrower. In this article, we covered the different credit score ranges that lenders can use to check the debt repayment ability of the Applicant. Follow Khatabook for the latest updates, new blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, Income Tax, GST, Salary and Accounting.