written by khatabook | November 11, 2022

Credit Reports in India and their Importance in Loan Approvals

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Table of Content


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.

CIBIL Score

Range

Meaning

NA/ NH

Not Applicable/ No History

A borrower does not have a credit history since he has never taken a loan or not used a credit card.

300 to 549

Poor

It shows the applicant has defaulted on credit card bills, EMIs, or missed payments. It reflects that he has many credit inquiries and poor credit utilisation. Lenders may not approve the borrower's credit application since they consider them at High risk of defaulting on the lender's loan. 

550 to 649

Fair

These borrowers might have irregular payments of EMIs. They even have multiple credit inquiries. Lenders may approve their loans at down payments and higher interest rates. There are even chances that they may not approve the loans.

650 to 749

Good

The borrower has a good credit history and repayment behaviour in the past. Lenders consider him at a lower risk of default. They might approve the loan application, but the rates may not be the best.

750 to 799

Very Good

The borrower has a responsible repayment history and regular credit payments. Lenders are likely to approve the loan at Good deals.

800 to 900

Excellent

It shows that the borrower has excellent financial management and low credit utilisation. Banks and lending institutions consider them low-risk and provide loans at the best rates and favourable terms.

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.

FAQs

Q: What credit scores are most commonly employed in India?

Ans:

Banks and non-banking financial institutions utilise credit scores from CIBIL, Experian, and Equifax to assess the likelihood of a customer loan going bad. The credit limits for all qualified consumers are set by the lenders using these scores. The three-digit CIBIL score falls between the ranges of 300 to 900.

Q: What are 5 things that decide your credit score?

Ans:

  • Payment History: 35% of the total

Your payment history shows how frequently you have made on-time payments.

  • The Amounts Due :Weigh: 30%

The sums you owe represent your current outstanding debt. The higher the credit score, the less debt is still owed.

  • Your Credit History's Length: 15% weight

The number of years that you've had credit accounts open in your name determines your credit history.

  • Your New Credit Application :Weight: 10%

Your rating drops each time you request for credit. The only time this rule does not apply is when you are looking for a mortgage, school loan, etc.

  • Credit Types You Use :Weight: 10%

If you appropriately employ various credit kinds, including instalment and revolving loans, your score may rise.

Q: What does FICO stand for?

Ans:

FICO stands for the Fair Isaac Corporation. A good FICO score ranges between 740 and 799.

Q: What is the difference between a credit report and a credit score?

Ans:

A credit report summarises a Person's past credit behaviour. The credit score is a three-digit summary that determines credit risk according to the information in the credit report.

Q: What is the importance of the credit score range?

Ans:

Typically, credit scores range between 300 to 850. Scores go into one of five categories, including bad, fair, good, very good, and exceptional, depending on where they fall within that range.

A credit score is often a three-digit figure used by lenders to determine your creditworthiness for a mortgage, credit card, or other lines of credit as well as the interest rate you will be charged. The score is a representation of your credit risk to the lender at the time of your application, and your credit score range is used to evaluate the entire process.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.