CRACKING THE CREDIT SCORE CODE

Understanding how lenders decode credit scores can help shape loan terms and pave the way for smarter financial decisions

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A background check is a common practice in various scenarios, such as job interviews, arranged marriages, or passport applications. Similarly, when an individual applies for a loan, banks and financial institutions must assess the applicant’s repayment behaviour and overall creditworthiness.

Since they lack firsthand knowledge of the applicant’s financial habits, they rely heavily on the credit score as a key indicator. This score serves as a vital input to help them decide whether to approve the loan, determine the maximum amount that can be granted, and set an appropriate interest rate.

Consequently, the credit score acts as a vital barometer of an individual’s financial health and creditworthiness, guiding banks and financial institutions in their lending decisions.

WHAT IS A CREDIT SCORE?

A credit score is a numerical representation of an individual’s creditworthiness, calculated based on various parameters including their payment history. This score enables lenders to make informed decisions. Typically ranging from 300 to 900, higher scores indicate better creditworthiness. A score above 750 is generally considered ideal by lenders, as it reflects responsible credit behaviour.

Credit rating bureaus are institutions that calculate an individual’s credit score. In India, the Reserve Bank of India (RBI) has authorized four agencies: TransUnion CIBIL, Experian, Equifax, and CRIF High Mark. Among these, TransUnion CIBIL is the most well-known credit ratings agency, benefiting from a first-mover advantage and partnerships with a large number of financial institutions, covering millions of borrowers.

WHAT ARE THE KEY COMPONENTS THAT DETERMINE THE CREDIT SCORE?

• Payment History