Understanding Credit Score

A credit score is a numerical value to determine risk worthiness of a customer. Typically, a credit score is inversely related to the probability of default for any customer i.e. Higher the score, less risky is the customer. Credit Score is sourced from credit bureaus along with a credit report. Credit Bureaus make use of Customer’s historical payment profile to generate this report. Banks/ Creditors are allowed to source this credit report from the bureau after taking a consent from the consumer.

Each Bureau uses it’s own logic to arrive at the credit score. Following factors are taken into account while arriving at the credit score :

1. Recency : Recent Credit Account Defaults
2. Leverage : Credit Accounts with on-time payment history
3. Coverage : Non-Delinquent and Delinquent credit accounts
4. Delinquency Status : Defaults on Credit Accounts
5. Credit Application : Number of applications for opening new credit account in last 30 days

A credit report consists of a variety of information about a consumer’s credit history such as :

1. Total number of accounts with their active/ closed status
2. Total outstanding balance with secured and unsecured classification
3. No. of credit enquiries over past 6 months
4. History of delinquencies associated with each account
5. Details about customer’s address associated with each credit line
6. Timeline associated with each credit account

There are currently four credit bureaus in India operating under RBI guidelines viz. CIBIL, Experian, CRIF High-Mark and Equifax. Each of these bureaus generate credit score and credit reports based on their own logic. Creditors/ Banks usually source credit reports from multiple bureaus before processing any loan application. The range of consumer credit scores in India lies from 300-900.

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