Sarthak and Suruchi both work in the same office. Both have the same salary. One day, a loan company visited their office and both applied for a loan worth Rs. 1 lakh. After 24 hours, Sarthak got a message that his loan was rejected. On the other hand, Suruchi’s loan was approved. So why was Sarthak’s loan application rejected, but Suruchi’s approved? The answer is simple- CREDIT SCORE in India.
Sarthak’s CREDIT Score is 550 while Suruchi’s CREDIT Score is 797.
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WHAT IS A CREDIT SCORE in India?
It is a financial report card. Based on your financial track record, you are assigned a credit score that will decide your ability to get a loan. Your credit score establishes your first impression on your lender as it accounts for your repayment ability. Basically, your credit score determines your credit request approval.
A good credit score shall let you enjoy favorable terms and conditions against your loans. For example, if your credit score is on the higher end, you can get loans at a low-interest rates with flexible repayment tenures best suited to your needs.
Calculation of credit score
The reason why the credit score can determine one’s eligibility to get a loan is that it is calculated based on one’s credit history. It takes into account the following parameters:
- Timely Re-payment of credit
- Over/under utilization of approved credit
- Credit mix
- Duration of credit history
- Frequency of applications of credit history and,
- Demographics
Thus, it takes a 360-degree analysis of an individual’s credit files to calculate his/her credit score.
Here are some screenshots of Suruchi’s credit report:
CREDIT SCORE IN INDIA: AGENCIES
One of the most popular credit bureaus in India is the CIBIL and thus, at times, credit score is often called CIBIL score. It is indeed the most prominent credit score. However, there are several other Credit Rating Agencies and organizations that study an individual’s financial history to ascertain their credit score in India.
In India, there are mainly six credit bureaus that are registered under SEBI. These are-
- TransUnion Credit Information Bureau or CIBIL
- Equifax
- Experian
- Credit Rating Information Services of India Limited
- ICRA
- CRIF High Mark
All these credit bureaus use different algorithms to process an individual’s financial history. Different CRAs give different weightage to different factors to calculate the credit score.
Decoding the credit score
Credit score lies between 300-900 and irrespective of the CRA, the higher the credit score, the better it is. A score above 751 would reflect excellent financial health and the individual could get loans instantly at a low-interest rate. On the other hand, 300-580 is a critical range, wherein most lending agencies tend to deny/reject applications.
Please note: Different banks have different benchmarks for what they consider as a good credit score.
What if you don’t have a credit history?
Individuals who are new to the credit system do not have a credit score and usually get a credit score of NA/NH. You can get a credit score only after substantial credit exposure so that your credit history can be evaluated fairly. This doesn’t create a negative impression in your lenders’ eyes. However, very few lenders may have some inflexible conditions for NA/NH credit score holders.
THE RELEVANCE OF CREDIT SCORE IN INDIA
There is a wave of financial revolution in India. Financial institutions such as banks, NBFCs, payment wallets etc. are continuously introducing new products to help Indian youth fulfill all their aspirations. In fact, fintech firms such as Sqrrl are making financial services more convenient, accessible and flexible with each passing day. In this landscape, credit score in India becomes highly relevant.
Dependence of credit is inevitable today and establishing credibility is a big challenge when it comes to applying for credit. The credit score isn’t merely a score but a financial tool that says a lot. Maintaining a good credit score is thus the need of the hour. Based on your score, you can apply for a credit card/ loan from different apps. You should ensure to keep a track of all your scores, especially CIBIL score and Experian score.
