08-Nov-2017 written by : FSI-Team
If you stay in one of the metros then there is a big possibility that you know about the importance of credit score. Since most of the urban dwellers today need loans to fulfill their dreams. Owning a car, a house to stay, a foreign trip and so many other needs, apart from any emergency or exigency that may arise, the urbanites need credit facilities. And a good score is the least that is required for anyone to be able to access credit. The lending institutions look at one’s credit score to decide the terms of loan, apart from deciding whether the loan needs to be given or not.
However, it may be a possibility that you may not be able to understand whether your credit profile is in good shape or not. In the second edition of the survey conducted by Credit Sudhaar across major metros, only 14% could identify various sections on the credit report. In such a situation, how the score works and understanding on what is the difference between a credit report and credit score can be anyone’s guess.
To put is simply, credit score is an outcome of the data that is available on your credit report. While credit report captures the data submitted by the lending institutions across the country, the cibil score is the numeric expression of the data on report.
Credit score is nothing but the manifestation of probability associated with the individual on defaulting within a specific period. Lower the score, higher the probability. The score takes into account five major factors to predict the probability. Following are those five parameters:
This is the highest weighted factor which constitutes to 35% in score calculation. Your repayment history across the active and closed accounts impact once credit score
The amounts that you own to the banks contribute to 30% in score calculation. The amount owed by you across credit facilities and the total utilization of the available credit are considered over here. For example, you may have two personal loans where the current outstanding is only 50% of the actual loan amount, but your credit card outstanding is 90% of the prescribed limit, this factor will average out the total outstanding and a higher card outstanding may adversely impact the score
Taking into account the age of the credit facilities, this factor has a weightage of 15%
Variety of credit, meaning secured, unsecured, cards that you have taken forms part of this factor that has a weightage of 10% in calculation
Impacting the score by 10%, this factor takes into account the number and amount of loans taken in recent past.
Credit report is record of all credit accounts and facilities that you would have taken at any point of time in life. It gives a detailed summary on when was it taken, the lending institution, the amount of credit, rate of interest, closure date apart from giving a month wise status on how you repaid it over last 36 – 48 months. It also captures the status of delinquencies if any.
Lenders check the credit report than checking the score. This is especially true in case of large ticket transactions and products like home loan and personal loan.
While the score is a good indicator on how you are faring on your credit profile, it is important to check the credit report regularly to be able to check if all is well. This is because credit score can sometimes be misleading. As per a directive from the RBI, you are entitled to a free credit report from each of the four bureaus in India. So go ahead and obtain your report and check it out.