credit scores, retail customers, healthy credit score
In India, as financial awareness is rising, people are becoming more conscious about their financial fitness. In recent years, the surge in people seeking their Credit Information Report (CIR) has soared across many geographies and customer segments. Customers are realizing that a good credit history helps procure faster loans at softer rates from lending institutions.
Lenders use CIR while underwriting, which is obtained from a Credit Information Company (CIC). Over the last four years, the retail borrowers’ count has risen by 50% and trade lines have doubled. Moreover, credit bureaus are seeing strong growth via individual customers seeking their CIR directly from them or through third-party partners.
As specialized institutions, CICs collect and maintain the credit information of all borrowers, creating a comprehensive CIR for each borrower. The report contains details on customers’ loan amounts, payment history, identity and demographic details. A key component of the CIR is the Credit Score. In a nutshell, this report provides information and analysis of a customer’s financial behaviour and repayment capacity. CICs are trying to further enrich CIRs using various alternate data such as employment records, taxes paid, etc. Lending institutions use the credit score as a loan underwriting criterion and/or for deciding interest rates.
Most credit institutions have evolved their underwriting process using Credit Score as a gating criterion and developed their own Customized Score, which is a combination of CIR and application data. Unlike NBFCs and other lending institutions, banks have a different underwriting process and, depending on their target customers and risk appetite, they use the different score as a gating criterion. Note that loan decisions are always taken by lenders and not the CIC.
Decoding credit scores
A numeric score calculated primarily on a customer’s financial behaviour and repayment of previous loans, a credit score helps gauge customers’ repayment capacity and classify their risk quotient. Other factors impacting credit scores include:
• The end use of loans, which offers general insights into the customer’s lifestyle. An asset-based loan (e.g., home loans) is scored higher than unsecured spending-based loans such as personal loans
• Payment history on various loan accounts
• Total borrowings and the percentage of available credit a customer is using
• Multiple credit enquiries in a short span of time
• Joint loan or those where a customer is a guarantor and repayments are missed
Customers with higher scores are considered low risk, with lenders eager to offer loans. Additional benefits of a good score include:
• Access to consolidated offers: Customers have a better range of products and offers to choose from, including credit cards, mortgage loans, etc., which may be availed as per need.
• Lower interest rate: Credit institutions may offer more benign rates.
• Higher credit limit: A higher limit or more funding is likely.
Ensuring healthy credit scores
Credit scores won’t improve overnight. The various ways to improve credit scores:
• Regular, timely payments: Pay EMIs on time and in full every month.
• Control credit utilization: This is a percentage of the credit limit used. Lower utilization is better than full or over-limit utilization, which impacts credit scores adversely.
• Borrow as per repayment capacity: Borrow as per need and capacity to repay as debt might put customers in trouble in case of non-repayment.
• Build your credit history: Having little credit or no credit history can make the case difficult. But nowadays, credit bureaus score new-to-credit customers too or those having recently taken loans.
• Close unused accounts: Any unutilized or dormant accounts on borrowings should be closed as credit institutions report this to CIC, impacting credit scores based on the repayment history.
Always be aware of your financial fitness and monitor the credit score regularly. Customers can directly access their credit report from any credit bureau (such as Experian, CRIF High Mark or CIBIL) as regulators allow one free credit report to every individual annually. Free credit reports can also be accessed via various third-party platforms such as Clix Capital, Paisa Bazaar etc.
The writer is Head of Consumer Products – Clix Capital
Source: livemint
