16-Jan-2019 written by : FSI-Team
A credit score is the number that represents credit worthiness of an individual. Meaning, what are the chances of the borrower to default on the new loan that gets extended to him. These credit scores are generated through statistical assessment of the historical data available with the bureaus. The traditional lending process evaluates the borrowers’ request on two parameters. First the capability to pay and second willingness to repay. While the capability to pay gets assessed through the income documents.
The bureaus are custodians of historical data on one's debt. This includes the type of debt viz. secured, unsecured or revolving; loan amounts, usage of credit limits, month wise repayment patterns, current account status etc. The past behavior on all the debt instruments is taken into account to arrive at the CIBIL score calculation. Thus the statement that these scores are a measure of person’s behavior on repayment of debt is completely true.
Going beyond the above traditional and original usage of this numerical expression, these scores are being used far more extensively in matured economies like the US. These are being used for determining the insurance premiums and extending telecom connections. A person would be assumed to be riskier and charged a higher premium on the insurance policies that he wishes to buy. Similarly he may even get denied if not charged a higher pre-paid terrify in case the credit score is poor.
The credit scores are in fact being used not just to assess those personal loans that people apply for, but quite interestingly, is now also being used by dating sites. There are sites in west that consider one’s credit profile to make a match for the probable date. Similarly, the house owners are also making use of the credit worthiness to decide whether to give the house on rent to an individual or not. This implies that these scores are being considered to evaluate the trustworthiness which is again a behavior facet of the approach that the person would have on the obligations.
"Anatomy of Credit Score", a study conducted at the University of Texas at Dallas goes a step ahead and mention, "Our study seeks to find which, if any, underlying preferences or personality factors contribute to the credit score. We consider four factors: impatience, impulsiveness, risk tolerance, and trustworthiness. It seems reasonable to expect lower credit scores to be associated with greater discounting of future payoffs: that is, impatience is associated with a desire to move consumption toward the present from the future by borrowing, and higher borrowing implies a higher probability of default. Impulsive individuals are likely to have difficulty resisting the temptation to borrow for present consumption, and more likely to fail to pay their debts. Poor credit scores could also be caused by a lack of trustworthiness, as the less trustworthy fail to meet their obligations.
The formal credit score that is being used today by all major bureaus across the globe got initiated over 5 decades back and has since then used the plethora of data getting updated regularly to understand the behavior patterns of the borrowers. The ongoing analysis on the patterns of repayment by the borrowers by taking into account variety data points like all details pertaining to the debt instruments, age of borrower, place of stay etc has helped in devising that numerical expression that would be called a person’s behavior measure of repaying debt.