A credit report is like a scorecard giving information about how well you manage your finances. It is a historical record of how and when you pay your bills, how much debt you have, and how long you have been managing credit accounts.
Less than 100 years ago, banking was a very personal experience. If you wanted to borrow money, you would need to walk into a local bank and personally convince a loan officer to give you the loan. You would have needed to show your proof of identity, proof of residence, income, employment information, etc.
Back then, nearly all lending was secured, meaning you would need to put up some sort of asset in order to take out the loan. For instance- you have applied for a home loan so the home will be your asset. In banking terms, your asset will be called collateral. Loans with collateral are known as secured loans.
Since then, the rise of credit cards as a convenient, electronic purchasing tool has made unsecured lending quite common, And although unsecured lending can be more profitable for banks, it’s also highly risky because there’s no collateral for the bank to repossess if the debtor doesn’t pay back the loan.
As a result, the credit report system was created to give banks a centralized source of information about potential borrowers.
The information on your Credit Report
- Personal information
It contains your Personal details (Name, PAN Card, DOB) as reported by banks. Make sure this information is accurate.
- Contact information
Various contact details provided by various lenders are recorded here. Up to 4 addresses are mentioned here.
- Employment information
Monthly or annual income details are captured here as reported by the lenders. As mentioned at the time of loan application.
- Account information
Contains the details of your credit facilities including names of lenders, type of credit facilities, account number, ownership details, date opened, date of last payment, loan amount, current balance, and a month on month record(up to 3 years) of your payments.
The below section represents your payment behavior. Any irregularities in payments are recorded here.
- Enquiry information
This section details out which lenders are requesting/ enquiring about your credit details. The purpose for which the enquiry is made is also mentioned.
Today, companies use the data in your credit report to create credit scores, which most lenders will use in their underwriting as an alternative to manually reading your credit file.
What is a Credit Score?
Before credit scores were invented in the 1950’s, lenders took a much more social approach in determining your creditworthiness.
Your credit score is a three-digit number that represents the risk a lender takes when you borrow money. A credit score can significantly affect your financial life. It plays a key role in a lender’s decision to offer you credit.
“More than 50 million adults had no credit score at all in 2015”- Consumer Finance
In 1956, engineer Bill Fair teamed up with mathematician Earl Isaac to create Fair, Isaac, and Company, with the goal of creating a standardized, impartial credit scoring system. Within two years, they had begun selling their first credit scoring system.
Today, that company goes by a different name: FICO
“Credit scores weren’t invented until 1950 when Bill Fair and Earl Isaac founded FICO “
– The Street
The current FICO score system was introduced in 1989 and has become the industry standard. It is a number between 300 and 900 determined by the following factors (by descending level of importance): payment history, amounts owed, length of credit history, types of credit used, and recent credit inquiries.
“As late as the mid-1990s, many South African credit scores considered the color of the borrower’s skin. Lower scores would be calculated for black consumers”
Conversely, a credit score of 700 or above is generally considered good and may result in a borrower receiving a lower interest rate. Scores greater than 800 are considered excellent.
“The average FICO score hit 706 for the first time in September 2019”- FICO
TransUnion CIBIL Limited is India’s first Credit Information Company. It collects and maintains monthly reports(Credit Information Report -CIR) from banks and financial institutions, detailing the individual’s loan and credit card payment history.
“Checking your CIBIL score and report before applying for a loan or credit line is an important step, but that should not be the only approach to credit management,” said Hrushikesh Mehta, vice president of TransUnion CIBIL’s Direct-to-Consumer business
Your CIBIL Score is one of the first checks that a lender does when they are evaluating your loan application. Your CIBIL score ranges from 300 to 900 and the higher your score, the better are your chances of getting a loan approved.
“What is striking is the huge proportion (20-25%) of high-risk-profile customers (with CIBIL scores below 650) in the personal loan, credit card, and consumer durable credit segments currently,” said a recent report by Edelweiss, an Indian financial services company
It is important to know that 90% of the loans are granted for individuals with a score greater than 750.
The higher your CIBIL Score, the higher are the chances of your loan application getting approved. CIBIL score is calculated by various credit bureaus using their own proprietary algorithm, but the main elements of score composition revolve around the loan and credit card repayment behavior of an individual.
Credit Bureau is a company that collects information relating to the credit ratings of individuals and makes it available to banks, finance companies, etc. A credit score is offered by three different credit bureaus of the Reserve Bank of India. They are Experian, Equifax CIBIL, CRIF Highmark. CIBIL is quite popular as it has been in the business for a long time.
CIBIL SCORE VS CIBIL RANK
- A numeric summary of your company credit report(CCR)
- Available for companies with credit exposure between INR. 10 lakhs and INR. 50 crores.
- Ranges between 10 and 1, the closer your rank is to 1, the better are the chances of your company securing a business loan
- A 3 digit numeric summary of your Credit Report.
- Available for all individual consumers
- Ranges from 300 to 900
CRISIL SCORE VS CRISIL SCORE
CRISIL is a rating company. Its primary objective is to rate the quality of debentures, bonds, deposits etc. issued by the companies to raise debt capital from the public. This Rating gives an idea to the investor as to how risky or safe is any particular public issue of debt by a company.
“Crisil, India’s first rating agency, now draws almost 75% of its revenues from its global analytics business”-TOI
CIBIL is a credit information company. Its primary objective is to collect the data on all the loans availed by a particular individual from across all banks and assign a Credit Score based on how regular (or irregular) that person is in making payment of his loan interest and installments. This score gives an idea to a prospective lender as to how risky or safe it would be to lend money to that particular individual.