Four Credit Information Companies or Credit Bureaus operate in India – TransUnion CIBIL, Equifax, Experian and CRIF Highmark. These institutions are licensed to collect and maintain financial records pertaining to individuals and generate credit reports/ credit score based on this data.
Credit reports and the credit scores that they contain are used by lenders to analyze an individual’s creditworthiness and financial prudence. Individuals can easily access their credit report and know their credit score to determine their eligibility for new credit cards and loans.
What is Credit Score & Credit Report?
The credit report comprises a person’s credit history with detailed information of his/her credit accounts (credit card and loans), bankruptcies and late payments (if any).
Another key detail included in a credit report is the list of banks/NBFCs that have made an enquiry for the consumer’s credit report. Currently credit reports are issued by Credit Information Companies (CIC) licensed in India. These are – TransUnion CIBIL, Equifax, Experian and CRIF Highmark.
Credit score is calculated using a complex proprietary formula using credit history data found in the credit report. This score is affected by a range of factors such as payment and borrowing patterns, the number of credit card or loan applications, credit utilization and so on.
As the formula used for generating credit score is proprietary, it varies from one credit bureau to another, so the credit score of the same individual also varies from one CIC to another. Credit score is one of the key factors responsible for the approval of a loan or credit card application. The closer an applicant’s score is to 900, greater are his/her chances of being approved for new credit cards/loans.
Factors Affecting Your Credit Score
The importance of a good credit score for those seeking a new loan/credit card cannot be overstressed. Hence it is of key importance that we know the key factors affecting. Some factors which affect a person’s credit score are given below:
a) Credit Utilization Ratio: Credit Utilization Ratio is obtained by dividing the amount of credit availed by the available credit limit. It indicates your dependence on credit. A high credit utilization ratio also indicates an increase in the repayment burden and thereby negatively impacts your credit score. A low credit utilization ratio (30% or lower) indicates higher credit worthiness and enables a person to secure additional credit more easily
b) Multiple Simultaneous Loan Enquiries/Applications: Making several loan enquiries and applications with multiple lenders within a short period of time shows you to be credit hungry. This also leads to an increase in the number of hard inquiries made by these lenders on your credit report which negatively affects your credit score.
c) Repayment History: Your credit score is affected by the history of your loan repayment like timely payment of your EMIs (equated monthly installments) and credit card bills. Repeated or frequent missing of credit card payments or EMIs negatively affects your credit score and thereby your ability to secure new credit. It points towards an inability to make timely payment of debts.
d) Credit Mix: It is good to have a balanced mix of secured and unsecured credit. Having too many unsecured loans like credit cards and personal loans may adversely affects your credit score as it is often interpreted as a sign of mismanagement of personal finances. As your credit score is likely to go up if you have a mix of secured loans (like Auto and Home loans) and unsecured loans, your chances of availing new credit increases.
e) Increasing Credit Card Limit Frequently: Frequent requests for increasing the credit limit on your credit cards increases the number of hard inquiries which may adversely affect your credit score. It also shows a high dependence on credit to manage your expenses which indicates a high debt burden and may be interpreted negatively by lenders.
f) Lack of Credit History: Your credit behaviour, credit utilization limit, loan repayment history, etc. is used to calculate your credit score. Absence of a credit history adversely affects your credit score. In case you have never taken a loan or never had a credit card, it becomes difficult for the lender to determine whether you fall in the low or high risk category.
g) Errors in Credit Report: Your credit score may be adversely affected by errors made in the credit report like errors in personal information, incorrect mention of default in repayments, etc. These may be administrative errors or may indicate fraudulent usage. Also, delayed or incorrect reportings by banks may show faulty information on your credit report and may adversely impact your credit score.
Types of Credit that impact your Credit score
Credit is typically categorized either as secured or unsecured. Examples of secured credit are home loan, loan against property, gold loan etc. that are secured by collateral (security) such as property or gold. Whereas, unsecured loans like credit cards and personal loans do not require any collateral/security.
- Having credit mix is all about maintaining a balanced mix of secured and unsecured loans. This can reflect favourably on your credit score and increase your chances of availing new credit.
- On the other hand, your credit score is adversely affected in case you have too much unsecured debt and in such cases prospective lenders can perceive you as a risky borrower.
Credit Bureaus in India
Licensed credit information companies (CIC) also known as credit bureaus collect financial information pertaining to individuals and generate credit reports based on that information. These credit reports are in turn used to evaluate an individual’s credit score, which is used by banks and lenders while granting new credit cards or loans to a person. Credit score helps to determine the creditworthiness of an individual. The 4 major credit bureaus operating in India are-
- TransUnion CIBIL
- CRIF Highmark
How to Check Your Credit Score for free
Each of the 4 credit bureaus – TransUnion CIBIL, Equifax, Experian and CRIF Highmark generates its own credit report and score. While your credit report will contain the same data in terms of your credit history, your credit score will vary from one CIC to another. You can check your CIBIL score as well as the credit score provided by other CIC for free online by visiting the Paisabazaar.com website The steps to check your credit score through Paisabazaar.com are as follows:
Step1. Visit paisabazaar.com and click on the ‘Get Free Credit Report’ button on the homepage
Step2. On the page that opens next, fill in details like your gender, name, date of birth, PAN number, etc. and click on the checkbox to agree to the terms and conditions associated with checking your credit score.
Step3. Click on ‘Get Your Credit Score’ get access to your credit score for free online.
How is Credit Score calculated?
Different credit bureaus – TransUnion CIBIL, Equifax, Experian and CRIF Highmark use different scoring model to utilise credit report data for generating credit scores. These scoring models utilise several factors when generating the credit score of an individual and depending upon the scoring model used, the impact of each factor on the final credit score varies.
This is the reason why the same person will have a different score from different CICs even though the credit history is exactly the same. This occurs simply because credit bureaus have their own unique proprietary algorithm which they use to calculate a person’s credit score and the exact breakup of the various factors that impact the credit score cannot be known.
Some key factors which influence a person’s credit score are given below:
- Credit Mix: A balanced mix of secured and unsecured loans positively affects your credit score. However, having too many outstanding unsecured loans like credit cards and personal loans may prove to be unfavourable as it shows you as a potentially risky borrower
- Length of Credit History: Your credit score is also affected by the duration of your credit history.
If you have had a loan for a long period of time and made timely payments on it, it will favourably impact your credit score
- Credit Utilization Ratio: It is the amount of credit that you utilize as opposed to your available credit limit. A high credit utilization ratio indicates a higher dependency on credit and an increase in the repayment burden which negatively impacts your credit score.
- Loan repayment history: Defaulting on your EMIs or making late payments repeatedly has a negative impact on your credit score
- Number of Hard Inquiries: Each time you apply for additional credit, the respective lender makes an inquiry on your credit report. Such inquiries by financial institutions and lenders are known as hard inquiries and too many hard inquiries within a short period shows you to be credit hungry applicant with potentially high risk of future default
Understanding Credit Score & Credit Report
Credit Score is a 3 digit numeric summary of your credit history. It ranges from 300 to 900 and reflects a person’s credit behaviour. This 3 digit number effectively sums up an Individual’s credit history including repayment history; frequency of applying for credit cards, loans, etc. A higher credit score generally leads to more favourable credit terms. Key details that are included in the report are:
- Credit score,
- Detailed information of your loans and credit card accounts including limits and outstanding balance
- Late payments and defaults (if any)
- A list of entities that have made an enquiry for your credit report and the reason for the enquiry (new loan/new credit card, etc.)
- Your personal information
It must be pointed out that your credit report does not include information about your savings, investments, paid or due utility bills, etc. (unlike credit reports in many other countries other than India). Each credit information company – TransUnion Cibil, Equifax, Experian and CRIF Highmark generates its own report using various scoring models.
Credit scores range between 300 and 900. A score closer to 900 is generally considered to be a good score and enables an individual to secure credit on more favourable terms as it indicates responsible credit behaviour. The general credit score range is given below:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Excellent: 800-850
How to Improve Your Credit Score
Some ways to improve your credit score are given below:
- Credit Mix: Try and maintain a balanced mix of secured and unsecured loans. Having too many unsecured loans like personal loans and credit cards, makes lenders consider you as a risky borrower and may decrease your credit score
- Timely Payment of Dues: Try and pay your dues on time. It indicates a responsible credit behaviour and repayment ability
- Frequently Checking Your Credit Report for Errors: Credit report must be checked frequently for administrative errors and fraudulent usage of data/information. These must be reported and rectified timely. This may help to boost your credit score
- Avoid Multiple Simultaneous Loan Enquiries/Applications: Avoid making too many credit applications and inquiries within a short period of time (or making inquiries with multiple lenders simultaneously). This may increase the number of hard inquiries on your credit report and adversely affect your credit score.
- Low Credit Utilisation Ratio: Reduce your credit utilization. Try and limit your credit utilization to a maximum of 30% of your available credit limit. Spending more than 30% of the available credit shows your excessive reliance on credit and adversely affects your credit score
- Increase in Credit Limit: Try and get banks to increase the credit limit on your card. This does not mean that you start spending more or increase your expenses. But rather it helps to decrease the credit utilization ratio as the available credit limit increases but the usage remains low. This has a positive impact on your credit score
- Don’t Settle Your Debts: Avoid settling your debts. Though it may reduce the debt burden, it shows an inability to repay your debts and may thereby adversely affect your credit score.
How Credit Score impacts Your Eligibility?
Credit score helps lenders determine the creditworthiness of an individual and assess the risk of default on repayments. In effect it acts as a first impression for the lenders. The higher the credit score, the higher are the chances of an individual securing a loan and on favourable terms. Credit score impacts your eligibility to secure personal loans, car loans, home loans and credit cards in the following ways:
- Personal Loans: A low credit score may lead to your loan application being rejected outright, whereas, a high credit score increases the chances of your loan application being reviewed and approved. A high credit score may also lead to the individual securing credit on more favourable terms such as a lower interest rate, a higher loan amount or longer tenure.
- Car Loan: Individuals with higher credit score may secure loans with lower rate of interest and may also qualify for 0% financing on new car loans. Credit score may also affect the down payment amount as individuals with lower credit scores may be required to pay larger down payment amount as they pose a greater risk to the lender.
- Home Loan: A good credit score increases your chances of securing a home loan and enables you to negotiate better terms and conditions.
- Credit Cards: A high credit score increases your chances of securing more credit, avail higher credit limit and get access to credit cards with better rewards and benefits. Those with high credit score may also be able to avail credit at lower rates of interest and on favourable terms.
Why Should You Maintain a Good Credit Score?
Though credit score is not the only thing that lenders consider when lending money to a person, it is definitely one of the first things that lenders look into when evaluating loan applications. There are several benefits of maintaining a good credit score. Some of them are given below:
- A good credit score increases the chances of your loan application being approved, as a high credit score indicates good credit behaviour, higher credit worthiness and lower risk for the lender
- Quick and easy approval of loans
- Access to pre-approved loans
- Good credit score enables you to secure credit on more favourable terms. You are able to negotiate better, get credit at lower interest rates , for the desired amount and tenure
- Get credit cards with better rewards and benefits
- Avail higher credit card limit
- Avail discount on processing fees and other charges
Difference between Credit Score & Credit Rating
In some cases, the terms credit score and credit rating are used interchangeably. However, there is a marked difference between the two. The differences between credit score and credit rating are given below:
|Credit Score||Credit Rating|
|Credit score is a 3 digit numeric summary of your credit history and helps determine the creditworthiness and financial health of an individual across loan types and lending institutions.||Credit rating pertains to financial products like shares, bonds, mutual funds, Certificate of Deposit, etc. Credit ratings are usually given in alphanumeric combinations like AA+, AAA,etc.|
|Credit institutions licensed to generate credit report and credit scores in India are TransUnion CIBIL, Equifax, Experian and CRIF Highmark||Companies authorised to give credit rating to financial products are CRISIL, ICRA, Brickwork Ratings India, etc.|
|It helps lenders evaluate the risk involved in lending money to an individual||It helps an investor to gauge the risk involved in investing in a particular financial product|
It is also notable that CIBIL currently offers a service for businesses known as CIBIL Company report which includes a CIBIL Rank which is similar to the credit score for individuals. However, this too is not the same as credit rating which exclusively applies to financial products.
Q1. Is credit score & CIBIL score the same thing?
Credit score is a 3 digit numeric summary of your credit history. It is affected by a number of factors including the individual’s payment and borrowing patterns, credit utilization, the number of credit card or loan applications and so on.
There are 4 major credit bureaus in India which are licensed to generate individuals’ credit reports and scores. TansUnion Cibil is one of the major credit bureaus in India and the credit score generated by TransUnion CIBIL using its own proprietary algorithm is known as CIBIL score. Thus in effect, CIBIL score is just one of the types of credit score available in India.
Q2. What is considered to be a good credit score?
The 4 credit bureaus- TransUnion CIBIL, Equifax, Experian and CRIF Highmark, generate their own credit scores using different scoring models and thus they provide different scores. Individuals and lenders usually rely on the CIBIL score or the credit score generated by TransUnion CIBIL. The score ranges from 300 to 900 and a score closer to 900 is usually considered to be a good score as it indicates greater creditworthiness and responsible credit behaviour.
Q3. How often are credit scores updated in India?
Credit Institutions submit data to credit bureaus every 30 – 45 days after which the credit scores are updated by the credit information companies.
Q4. Is credit score needed to buy a house?
In case you want to secure a home loan to purchase a house, credit score is generally the first thing that lenders look for to assess an individual’s creditworthiness and repayment ability.
Q5. Can credit score affect your ability to get car insurance?
No, credit score only determines the creditworthiness of an individual or the risk involved in lending money to a person. It does not affect your ability to secure insurance in anyway.
Q6. How many credit score points are lost for an inquiry?
There are two types of inquiries-hard inquiries and soft inquiries. Soft inquiries are made by the individual himself/herself and these do not impact the credit score irrespective of the number of times it is done. On the other hand hard inquiries are those that are made by lenders and financial institutions when the individual applies for new credit i.e. new loan or credit card. In most cases, hard enquiries lead to a decline of only a few points
Q7. Why do different credit bureaus have varying credit scores?
Different credit bureaus have varying credit scores as there is a difference in the scoring model used. As a result, even though the data in the credit report is exactly the same, there is a difference in the score depending on which credit information company computes the score.
Q8. What is the best/ideal credit score?
It is difficult to determine the best/ideal credit score. However, a score closer to 900 is generally deemed to be a good score for being approved for new loans/credit cards.
Q9. Is credit score and FICO score the same?
No, FICO score is only one type of credit score. Credit score is a wider term and used to refer to the score calculated by different credit information companies operating in India – TransUnion Cibil, Experian, Equifax and CRIF Highmark. FICO score is calculated by the credit information company Fair Isaac Corp. using its own proprietary formula and it currently does not operate in India.
Q10. What is the minimum credit score to secure a home loan?
There is no minimum credit score to secure a home loan. The closer your score is to 900, the better are your chances of securing a home loan and also for securing it on favourable terms such as low interest rate, higher loan sanction limit, etc.
Q11. Can credit score be zero?
No, the credit score can never be zero. However, in case an individual has no credit history or is very new to credit, they may be accorded with credit scores “NA” or “NH”.