Banks and financial institutions use credit scores to judge potential borrower’s creditworthiness. Credit score also measures the risk of default by judging the past history of credit repayment by a borrower. Only credit bureaus approved by RBI can give a credit score. The four RBI approved credit bureaus are TransUnion, Experian, CRIF Highmark, and Equifax.
What is a CIBIL score?
CIBIL score is the credit score that is produced by TransUnion. In India, CIBIL has become ubiquitous with credit score similar to how Xerox became synonymous with copy machines. CIBIL scores usually range from 300 to 900, and a higher score is desired. However, it is important to understand that the other 3 credit bureaus give credit scores to banks and customers with the same data.
RBI requires all banks and credit institutions to report all credit related data to all the four credit bureaus periodically. Hence, all the four credit bureaus use the same data to come up with credit scores. There are small differences in how different bureaus calculated credit scores. However, they all offer very similar data.
What affects a credit score?
Credit scores are dynamic based on the most recent credit data reported from banks to the credit bureaus. That means credit scores can be improved even if a person has had a bad credit score in the past. Below are some reasons that can affect your credit score:
- Credit repayment history: Credit bureaus like to check that periodical and timely payments are being made by borrowers.
- Default history: A default on credit card bills or loans could affect one’s score adversely.
- Credit Utilization: Credit utilization is the ratio of total credit used versus the percentage of the total credit available. When credit utilization is low, borrowers are showing a responsible attitude to maintaining healthy credit.
- Multiple loan/credit applications: When a borrower puts many applications for a credit product with different banks, it is understood that the borrower might not be qualifying for products elsewhere. Or that
- 3rd party guarantor: Many people are unaware that guarantors of loans are also negatively impacted when the primary borrower of the said loan does not have a healthy account of credit repayment.
Why is it important to maintain a good credit score?
A credit score is one of the most important criteria for banks when deciding whether or not to lend a borrower. Banks also offer better rates for borrowers with better credit scores. The importance of credit scores will increase dramatically as credit penetration increases in India. How to check your CIBIL score for free?