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18-Aug-2016 written by : FSI-Team

The world around us is accelerating at an overwhelming velocity and sometimes it becomes difficult to keep up with it. We constantly endeavour to bring the latest updates for our readers. Though some people would argue that CIBIL score itself is an alien concept, surely it would be surprising to all that the market is gradually transitioning towards newer score models. That’s true. Lending institutions are considering "non-traditional" scoring models alongwith the conventional credit scores, as they believe it gives them a deeper insight into a person’s characteristics as a borrower.

Traditional Score

Credit scoring bureaus, such as CIBIL, collate credit history into a customer's credit report and would share it only with credit institutions and customers at their request. The score is just a 3 - digit "snapshot" numeric summary of the credit history as mentioned in the report. It is calculated with the help of advanced analytics, not known outside of the bureau. Your score can be anywhere between 300 and 900, with a lower score indicating a higher probability of default based on consumer's financial past.

Credit institutions rely a lot upon doing a thorough background check before they extend credit facilities to anyone. Credit scores play a very crucial role in loan evaluation procedures. Several factors are considered when arriving at that figure, they are:

  • Repayment history
  • Outstanding debt and available credit limit
  • Age of credit history
  • Number of credit accounts
  • Fresh inquiries etc

It would be unwise to discount the importance of your CIBIL score. Don't lose focus and aim to increase CIBIL score at all times. However, there is more to a person's finances than just dealing with credit card bills and loan repayments. That's why lenders began prodding more into a customer's payment obligations. Thus, the idea of a certain few "non-traditional" scores came up.

Non-Traditional Scores

There is a large section of population who do not have a credit score due absence of any past credit relationships. It is no secret that your credit score is based on past credit pursuits, but if you have kept yourself away from even having a regular credit card in your kitty, then obviously you have no credit score. Such people cannot be marked as risky or not-risky because there is no established record to make such deductions.

Traditionally, people with no credit background were considered ineligible for loans. But they could be good paymasters as they pay on time:

  • Rent
  • Utility Bills
  • Insurance Premium
  • School Fees
  • Telephone Bills
  • Investments etc

Banks don't want to turn them down because they could be honest, well-meaning customers. Thus, new scoring models were found to basically help such people and also improve the accuracy of predictions based on traditional scores.

Let us take a look at some new types of scores:

1. Social Credit Score: Has it occurred to you what would the Google throw up if you entered your name as the search string? Don't be taken aback when your latest vacation pics surface instantly. It is not uncommon for prospective employers to do some digging into your public profiles at various social networking sites such as Facebook, LinkedIn, Google+ etc. It is practically a window into your personal life.

Ideally, while you would not like to mix your professional and personal lives, it seems your employers and lenders tend to disagree. Though you would want to keep these things private, the companies believe, it helps understand the true psyche of a person and analyse how he/ she will turn out as an employee and/or borrower. As they say, "A man is known by the company he keeps".

Fact is there are formulae to score you on parameters based on your social interactions. C.I.s and employers are checking these scores. Calm or misanthropic, your credit scores reveal it all.

2. Psychometrics: You have been facing trouble in obtaining loan for low credit score or no score at all, don’t worry and just take a test. Similar to I.Q. tests, bank's intention behind such a test is to analyse the traits of a sound borrower. For some small business entrepreneurs, with no credit history, these types of tests have come as a boon. Because they can now get access to funds by showing their right mindedness. Though this process has not been 100% validated but the companies who have used it vouch for its credibility as much as the traditional scores. Besides this, the psychometrics score model cannot be entirely standardised and will need several iterations to account for the differences between term loans, credit cards and other loan products.

3. Insurance credit score: Insurance companies in nations in the west use a proprietary formula of their own to calculate a score of their own, based on information given in your credit report. Based on this "undisclosed" score, insurance companies mark-up their premiums for those who they consider are relatively riskier than other clients. Primarily for car and home insurance this scoring method is used.

4. Miscellaneous others: Online shopping sites such as Amazon, Ebay etc now keep a track of your purchases, CODs, returns etc. Credit institutions may seek this data to score your intention to pay for your purchases. Similarly, telecom companies maintain a track of your bill payments and defaults to analyse your intent to pay for services used.

5. CIBIL Score 2.0: Keeping the current trends in mind, CIBIL has introduced a new score model to rate those with less than 6 months of credit history. Earlier, such clients would be marked as "NA" or "NH" making them disqualified for loans. However, now such people can also be rated on a scale of 1 to 5, with 1 signifying high risk and 5 as low risk.


Long Story Short

All these methods are basically to draw accurate deductions about a borrower's right intentions to repay what they owe. Since the new type of scores entered the frame, they have certainly changed the loan market's traditional beliefs. You may have a credit score to rave about, but if you fail on other aspects of your non-traditional scores then, a lender might have harsh terms for you or reject your application completely.

Don't be under any illusion that with the non-traditional scores making their way into the books, the traditional CIBIL score will be given the boot. They still retain their all important place as the preferred scoring model. The non-traditional scores are there to endorse and reinforce what the traditional score tells the creditor. And help those struggling with "no credit past". By adding new metrics, we enhance score accuracy with predictive indicators such as social network strength, online behaviour and lifestyle patterns.


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