When it comes to deciding the creditworthiness of a person applying for a loan, the credit score plays a very important role. Whether it’s for business, or major financial investments such as buying a house, or a car, most lending institutions consider the credit score as an eligibility criterion. Not just that – telecom/mobile companies are seeking a credit score for determining the credit limit for a postpaid mobile connection, while house rental agencies are looking at a prospective tenant’s credit score for renting an apartment!
Insurance companies in countries like the US and UK look at the credit score of an individual for fixing the insurance premiums, in addition to various other demographic factors. In fact, the RBI has mandated financial establishments to access the credit scores of all applicants for loans and credit cards to determine their creditworthiness. Thus, having a good credit score has become imperative today for enjoying many services.
There are various models for calculating credit scores and each time a lender requires a credit score, the credit scores are calculated on the scoring model of the lender’s choice. A good credit score helps small business owners negotiate for better terms with the lender.
Let’s take a look at some of the factors that affect credit scores…
Factors That Affect Credit Scores
- Payment History: Payment history of credit cards, loans, etc., including timely payments as well as the number of late payments if any and severity of late payments. This helps in assuring lenders about how effective is one in repaying the loans on time.
- Duration of the Credit History: When an individual has a long credit history, lenders are reassured that there is substantial and exhaustive information on the individual’s credit behavioural patterns and thereby they tend to give a better and higher credit score.
- Number of Hard Pulls: Hard Pulls or hard enquiries are made when by a lender checks one’s credit (to approve a loan or some credit or service like a credit card) when an individual applies for a credit. Though a single hard enquiry may not have much impact on a credit score, multiple investigations (especially when one tends to take multiple loans) can have a negative effect. A hard pull remains on the credit report for a couple of years and may result in a drop of 5 to 10 points in a credit score.
- Negative Issues: Issues like foreclosure; defaults in payments etc. can negatively impact the credit score and can restrict one from being eligible to obtain a loan.
- Public Factors: Any known records such as bankruptcy, will definitely harm the credit score.
- Other Factors: Factors like credit utilization rate, amount of debt, age of credit accounts and number of new credit accounts etc. have an impact on credit score.
The 4 Major Credit Bureaus In India
Experian PLC, a global consumer credit reporting company, headquartered in Ireland, has its branches in various countries including India. Experian is an independent entity that is licensed by the Reserve Bank of India (RBI).
2. TransUnion CIBIL
Credit Information Bureau (India) Limited, also known as CIBIL™, was India’s first Credit Bureau founded in 2000. Its technical partners are TransUnion International (a global credit Information Company) and Dun and Bradstreet (That provides credit information on a worldwide scale).
3. CRIF High Mark
CRIF High Mark is another credit bureau operating out of Mumbai and is an independent entity that is licensed by the Reserve Bank of India (RBI). High Mark caters to all borrower segments and has pioneered the building of India’s first Microfinance Bureau Database, which is also considered to be the world’s largest database for Microfinance.
Equifax Credit Information Services Private Limited (ECIS), is a joint venture company between Equifax Inc., USA and seven other prominent financial institutions in India. Equifax is headquartered in Mumbai and is an independent entity that is licensed by the Reserve Bank of India (RBI).
Why Do Credit Scores Differ?
A credit score is generally made up of a three-digit number ranging from 300-900. Any score more than 750 is considered to be an excellent and creditworthy score by lenders. The closer one gets to the 900 range mark, the better is his/her chance of securing the loan.
Here are a few reasons why different lenders may get different credit scores for the same applicant…
1. Scores are calculated using different scoring models:
The scoring model of all the four credit bureaus differs slightly in their computation manner though all lie predominantly within the limits of 300-900. The difference in scoring model lies in the weight factors given to various aspects of an individual like credit history, settlements and write-offs, the income: loan proportion etc.
For instance, the three credit bureaus namely Experian, Equifax and TransUnion CIBIL that have global operations teamed up together in 2006 to create a new firm called VantageScore Solutions that recently came out with the latest scoring model Vantage Score 4.0, above its earlier version VantageScore 3.0.
Likewise, each credit bureau follows slightly different standards in computing the credit score.
2. The scores may belong to different dates:
Credit scores may change at any given time; hence, it is necessary to compare credit scores across the same date.
3. Scores may be calculated by using different credit reports:
While specific lenders are connected to all four major credit agencies, other lenders may report to just one or two reporting agencies. This results in the probability that the credit bureau may be missing out any piece of information that either helps or hurts one’s score.
Is It Good To Have Multiple Credit Scores?
A credit score from a single credit bureau Isn’t good enough. The reason being credit scores are similar to fingerprints; no two scores can be the same.
As the scores calculated by each agency may differ slightly having multiple credit scores helps to offset one lower score with another excellent rating, and hence one can bank on whichever score works well for the nature of loan required (credit card loan, car loan etc.)
As mentioned earlier, credit bureaus periodically update their credit scoring models (like the VantageScore 3.0 to 4.0 version) so there are multiple score versions. Each version features unique formulas that cater to, say, credit card issuers, lenders for mortgage loans or automobile salespeople, and each placing importance on different factors.
For instance when going for an auto loan, if one has missed a payment of an earlier car loan or has a car repossessed, then these factors may be given extra weightage in the auto score computation by a particular credit rating company. Factors like missed credit card payment may also be noted and accounted; however, these may be weighed on a different scale.
Therefore, a borrower will tend to get marginally different scores depending on what credit bureau score is opted, like the TransUnion CIBIL, Equifax or Experian Credit Score, as weight factor differs among these credit bureaus depending on the score model and the nature of the loan required.
Though the credit scores may vary, they primarily depend on the nature of information delivered by the credit-reporting agencies. So, focusing on one’s credit reports will significantly assist building one’s credit across the board.
With credit rating system being already on the anvil for online shoppers that encompasses online portals like Flipkart, Amazon, eBay etc., it thus becomes imperative for every company and individual to optimise the credit score, and also for lenders to switch to a better solution for analysing and computing various credit scores. Additionally, periodical checks on the credit score are necessary to safeguard and prevent identity theft and also correct errors in the credit report.
Finezza’s Comprehensive Credit Score Computation
Finezza’s Credit Analysis solution offers several reports, which evaluate many combinations of various data points that are taken from multiple credit bureaus. These reports help you gain detailed insights into the creditworthiness of an applicant. Not only will this help you get a more comprehensive credit score, but also help you cater to a wider range of clients that you had probably rejected by referring to a single credit score! It will also reduce the time taken to process a loan application, leading to faster disbursal, and improved efficiencies in the loan management process. To know more, head here.
While credit scores may differ across companies, they all primarily focus on how responsible one is concerning the loan borrowed. Hence it is advisable to exert caution in spending, repayment of bills as well as using multiple credit cards. In addition, having credit scores from different bureaus would definitely help in the long run.