A high credit score means you have a good track record of clearing your debts, and so lenders will be more likely to trust you when you apply for a loan. Let’s take a look at whether this translates into any real benefits for you as a borrower in India.
Credit tracking agencies keep tabs on so many aspects of your financial record. Your borrowing pattern, your record in fully paying off your debts, your defaults on payments, and more. They even track credit utilization, how often you keep applying for loans and how many transactions you make on your credit cards. Each aspect is given a weightage and the total score reflects the credit behaviour of the individual.
If you have a record of taking up too many loan offers and accumulating debts without controlling your spending, it indicates an irresponsible and undisciplined attitude towards debt. If you often borrow money for non-essential purposes like upgrading your gadgets or living a lifestyle beyond your means, this will also indicate that you might not be able to meet your loan repayment schedule.
Besides credit scores, credit rating agencies also provide detailed reports on the credit history of each individual. This makes a lender’s job easier when vetting loan applications, as they can reject applicants who have very low credit scores.
When Ratings Disagree
You pulled your credit report and score from CIBIL and are feeling happy. Your score is above 800 and you feel that you now have a good chance of your loan application being approved. Perhaps, you might even be offered better loan terms because of your credit score.
Then one of your friends suggests that you check your credit scores from Equifax and Experian too. Well, you know you have been keeping up with all your loan and card dues, so these two agencies should give you a high score too. Right?
To your surprise, you find that one has given you such a low score that you begin to doubt whether this is based on your credit history or someone else’s. The other agency has given you a medium score, however. How is this discrepancy possible while assessing the credit history of the same individual?
Credit Records and Scoring
The Credit Information Bureau of India Limited (CIBIL) pioneered credit ratings for individuals in India. CIBIL scores assumed a significant role in the loan approval process, and you would often come across advice on how to improve your CIBIL scores.
Then other credit rating agencies stepped into the fray, each with its own methods of assessing a person’s credit record. Recently there have been many reports of huge discrepancies in the credit scores given by these agencies for the same individuals, lowering their credibility and leading to confusion among borrowers.
There is no set of regulations on how agencies rate the various elements in a person’s credit history. While regulators have urged the agencies to keep their credit ratings within the range of 300 to 900 for the sake of uniformity, there are no guidelines for the weightages assigned to various parameters by different agencies.
To stay competitive and stand out in the field, each rating agency devised its own method of assessing credit history.
And besides this, financial institutions do not provide the same level of informational access to all credit rating agencies. This missing data can also affect your credit scores.
Credit Rating Relevance
While these discrepancies in credit scores cause confusion, even high scores from the top agencies do not really benefit borrowers. Except possibly to speed up the loan approval process a little bit for applicants with high scores.
Banks have a tradition of extending lower interest rates and other benefits to corporate borrowers with a high credit rating. The same does not hold true when it comes to the retail banking sector. In the West, a high credit score is a powerful negotiation tool for customers, but in India retail customers don’t get comparable benefits for good credit scores.
Other Factors Affecting Loan Approval and Terms
There are many other details that are considered when loans are being processed. Which is why the number of required documents for Home Loan and other large loans are high. Banks require KYC documents and they ask for income proofs in the form of salary slips, bank statements, IT returns, balance sheets, profit & loss statements and so on to verify a person’s actual earnings.
They may also ask for records of other liabilities and proofs of your savings and investments. They could also track your monthly expenses and other factors.
Credit Rating – Current Scenario
Right now, without well-defined credit rating regulations and without guidelines from the regulatory body, there is little practical use for credit scores beyond the loan approval process.
Maybe in the future, banking regulatory authorities might issue revised guidelines to financial institutions on using credit scores. They might be asked to provide better terms on loans, like lower home loan interest rates, to borrowers who have a good credit history. But, until that day, treat your credit score simply as a means to faster loan approval.