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20% Consumers Have Different Credit Scores from What Their Lenders See

06-Dec-2017 written by : FSI-Team

20% Consumers Have Different Credit Scores from What Their Lenders See

According to a recent study by the Financial Protection Bureaus that's based on 200,000 credit files from three of the biggest credit bureaus Experian, Equifax, and TransUnion, 1 in 5 consumers is likely to receive a credit score that’s different from the one used by their lender.


Why the Difference?

Retails loans make for a large portion of the banking business. The majority of the traditional banks generate a good chunk of their overall revenue from these. In fact, lately, many new NBFCs have also emerged in the market after observing the potential to make profits.

Now, the thing to understand here is that whether we talk about traditional banks or P2P lenders there is always some risk when loaning money to an individual or a company. This is the reason why the lenders analyse the credit profiles of the applicants with the help of their credit scores (commonly known as the CIBIL score in India) and credit history, etc.

A few years ago, there used to be limited credit agencies only such as CIBIL, CRISIL, etc. However, as the demand increased, new credit rating bureaus were gradually set up.

Today, there are dozens of credit rating agencies in India, and they all use different credit score calculation formulas. In fact, their scoring range may also differ. For instance, a CIBIL score ranges from 300 to 900. However, an Equifax score ranges from 1 to 999. So, for you, the former could be 600 and the latter 700.

Even when the scoring range followed by two different credit agencies is the same, your score could vary. For instance, both CIBIL score as well as Experian score range between 300 and 900. However, they use different scoring formulas, meaning they give importance to different factors (length of credit history, punctuality in loan repayments, etc.). So, even though the range is same here, you still may end up having a different score with each.

Since different banks use credit scores of different agencies, it's possible that you are checking the credit score from one particular agency, but your bank is checking that of another credit rating agency.

Should You be Concerned?

It's natural to be worried thinking about whether there will be a mismatch in your credit score as viewed by you and your bank. However, do you really need to? The answer is both "yes" and "no".

If you have a low CIBIL score, then worrying is justified. However, if your score is good, then there is no need to worry. This is because although the scoring range and formulas vary from one credit agency to another, they are also similar in essence.

In other words, all the credit agencies award points for good credit habits, and deduct the same for bad credit habits. So, your score is likely to be high if you:

  • Always pay your credit card bills, loan EMI, etc. on time, every time.
  • Avoid making minimum payments on your credit card bills.
  • Have a credit report with mixed credit variety (personal loan, credit cards, home loan, etc.)

Similarly, you are likely to end up with a low CIBIL score or low Equifax score if you:

  • Max out your credit cards frequently
  • Are often late in paying your credit card bills
  • Are applying for a loan at several banks simultaneously
  • Have defaulted on a loan in the past
  • Have applied for a loan at multiple banks in a short period

These facts are universal. In other words, they will have the same effect on your credit score irrespective of the credit rating agency you pick.

The Bottom Line

People often get worried when they realize that they have a different credit score with a particular rating agency and a different one with another. However, there is no need for the same. Instead, you should just focus on inculcating good credit habits. So, if you pay your bills on time, keep your credit utilization low, and old bank accounts open, then no matter which credit agency you pick, your score will be always be good.


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