Off late, the credit score is becoming the talk of the town.
We believe all of you might have heard of it by now if you have applied for a loan. Be it a home loan, personal loan or credit card; a credit score is now becoming mandatory before the bank takes any decision on disbursement.
Do you know who is responsible for computing your creditworthiness?
This article shall provide answers to all your questions about creditworthiness, companies offering the services and new developments in the domain.
A credit score is a three-digit number that indicates the credibility of an individual. A credit score is similar to a mark that is given to you for your financial behaviour.
A high credit score indicates that an individual has excellent money management skills and has been repaying the liabilities promptly.
Similarly, a low credit score indicates, that a low score raises questions about your financial credibility.
Financial institutions use credit scores before processing any loans including credit cards.
A good credit score helps you get a loan quickly and at a competitive interest rate. In simple words, a credit score directs financial institutions if they can extend credit to you or not and thus impacts you directly.
Credit information companies compute a credit score.
In India, four companies provide this service. The companies are – CIBIL TransUnion, Experian, Equifax, and High Mark.
Let us now shift our focus to the new form of credit score launched by CIBIL TransUnion – The CIBIL TransUnion Score 2.0.
CIBIL unveiled a new form of credit score namely CIBIL TransUnion Score 2.0. The new score is a result of an improved framework and is believed to be a better predictor of risk.
It helps to make the right credit decision and also helps identify borrowers are having less than six months of credit. The score classifies every individual into two categories – risky and not-risky.
The new score is available for the CIBIL’s 862 member banks and financial institutions.
If you monitor the developments in the market closely, you will see a change in the behaviour of individuals.
The borrowers are now having an increased focus on home loans and car loans which were previously more inclined on personal loans and credit cards.
Thus, with the former two being the secured category, the new version of credit score was introduced to adjust for the change.
If you see your credit score, you will find a fall in the score under the new (2.0) framework when compared with the previous structure.
This decline is primarily due to a change in the ratio of secured versus unsecured loans and long-term versus short-term loans.
No, the change is not likely to impact your eligibility for availing of credit.
This is because the benchmark for approving loan applications is also revised under the new framework. Thus, while your score is declining in the new structure, the reference is also getting adjusted accordingly.
You may also want to read Why Is CIBIL Score Important – A Detailed Summary
The decision around credit application has become more objective rather than subjective.
The new framework improves the decision making quality by taking into account the customer lifecycle. It also takes into account the individual’s repayment ability.
Following are the categories:
The customers under this category are awarded a score between 300 and 900.
The ideal score of 751-800 under the previous framework is now rebased to 662-697 under 2.0.
The customers in this category are provided with a rating between 1 to 5.
While one represents a high risk, five indicate low risk.
This short-term score takes into account the number of days by which the repayment was delayed for any particular instrument during any of the months.
This rating is used when there is no credit history of the individual, or it has not been reported to CIBIL.
This rating could also mean that the customer does not have a credit history, but queries have been made. It can also mean that the individual has a credit history, but nothing has been reported in the past 24 months.
The CIBIL TransUnion Score 2.0 is available through different channels such as the web, online and FTP.
To conclude, we can say that significant improvement has been made toward credit decision making by credit information companies.
This score seeks to provide a scientific rationale regarding the creditworthiness of an individual. This shall enable banks to take the right decision while evaluating any loan proposal.
Disclaimer: The views expressed in this post are that of the author and not those of Groww