With over 119 million Indians monitoring their TransUnion CIBIL scores as of March 2024, India’s Credit Awareness Quotient is rapidly rising.
Credit awareness in India has reached unprecedented levels. What’s driving this growing interest in understanding credit scores?
Credit Information Companies (CICs), the guardians and calculators of a powerful 3-digit number called the ‘credit score’, sit quietly in the interconnected mesh of Digital Public Infrastructure (DPI) and work closely with Account Aggregators (AA). What if I told you that this three-digit number, conceived decades ago, still holds the power to shape your financial future?
This number can enable or disable your access to credit, influencing everything from loan approvals to interest rates.
Yet, for many, credit scores remain a mystery.
Today, let’s change that.
In this blog, I will unpack the complexities of credit scoring in India as I explore:
- The origin of credit scoring in India and the current landscape
- How is your credit score measured, and who does it?
- Decoding your credit score
- The far-reaching impact of your credit score
- The cost of credit information in India
Let’s start with the basics first –
What is a credit score?
Think of a credit score as your financial report card – a three-digit number that sums up your creditworthiness. It is measured on a scale of 300 to 900. The higher your score, the more credit-worthy you are and vice versa. When you apply for a loan or a credit card, banks turn to this number to get a quick snapshot of how responsible you’ve been with credit.
The origins of credit scoring in India
Recent data from a TransUnion CIBIL report provides fascinating insights into India’s credit landscape:
For lenders, this is a great opportunity to connect with a more informed and proactive consumer base. Promoting credit awareness drives innovation in financial products and services, enhances risk mitigation strategies/methods, and, in turn, contributes towards the creation of a resilient economy.
How is your credit score measured?
Credit Information Companies (CICs) are the unsung heroes of our financial ecosystem. They’re the ones crunching the numbers behind the scenes, analysing your credit history, and distilling it into that all-important three-digit score. These companies use complex algorithms to evaluate your creditworthiness, taking into account factors like your payment history, credit utilisation, and length of credit history.
In India, we have four major CICs that calculate credit scores – TransUnion CIBIL, Experian, Equifax, and CRIF High Mark.
Each of these bureaus calculates credit scores differently – the core principles are similar, but the specific approaches can vary.
How credit scoring varies across CICs
Here’s how the credit scoring scale across these bureaus looks:
Understanding this variety in credit scores is crucial. It’s not about fixating on a single number but rather about maintaining good financial habits that will positively influence all your scores.
What does this mean for you? Well, your credit score might be slightly different depending on which bureau a lender checks. But here’s the key point – while the exact numbers might differ, the main factors these bureaus consider are essentially the same.
Decoding your credit score
While the exact algorithms used by credit bureaus are closely guarded secrets, the broad strokes of credit score calculation are well-understood.
The following are the key components with their respective impacts on your credit score:
- Payment history – High impact
This is the heavyweight champion of your credit score. It reflects whether you’ve paid past credit accounts on time. - Credit Utilisation Ratio – High impact
This represents the amount of credit you’re using compared to your credit limits. Let’s break it down with a quick example. Imagine you have two credit cards:
- Card A has a credit limit of INR 1,00,000, and you’ve spent INR 40,000 on it.
- Card B has a credit limit of INR 50,000, and you’ve spent INR 10,000 on it.
To calculate your credit utilisation ratio: - Your total credit limit: INR 1,00,000 + INR 50,000 = INR 1,50,000
- Your total balances: INR 40,000 + INR 10,000 = INR 50,000
- Your credit utilisation ratio: (INR 50,000 ÷ INR 1,50,000) x 100 = 33%
A lower ratio is better, and experts recommend keeping it under 30%. Why does this matter? To lenders, a low utilisation ratio suggests you’re managing your credit responsibly.
- Length of credit history – Medium impact
The adage “old is gold” applies here. A longer credit history provides more data about your borrowing habits, potentially boosting your score. - Multiple credit accounts – Low impact
A mix of credit types (credit cards, personal loans, home loans) can positively influence your score and demonstrate your ability to manage various credit products. - Hard inquiries – High impact
Opening several new credit accounts in a short period can be seen as risky behaviour. Each time you apply for credit, it results in a hard inquiry, which can temporarily lower your score.
So, where do CICs get this information to assess you?
In India, Credit Information Companies (CICs) are regulated by the RBI under the Credit Information Companies Regulation Act, 2005 (CICRA). This ensures credit data is managed responsibly. Section 15 of CICRA mandates that all credit institutions, like banks and NBFCs, must join at least one CIC, enabling CICs to gather comprehensive credit profiles.
CICs collect and analyse data from various sources, including banks, NBFCs, credit card companies, and telecom providers. This data includes loan applications, repayment histories, and credit card usage, which CICs use to generate credit scores and reports. If you manage your finances well, this will positively impact your credit scores.
The far-reaching impact of your credit score
Your credit score is more than just a number; it’s a key that can unlock (or lock) financial opportunities. Here’s how it affects your financial health:
- Loan approvals – A higher score increases your chances of loan approval, be it for a home, car, or personal loan.
- Interest rates – Better scores often translate to lower interest rates, potentially saving you lakhs of rupees over the life of a loan.
- Credit limits – Credit card companies often offer higher limits to those with good credit scores.
- Rental applications – Some landlords check credit scores to assess potential tenants.
Having talked about the potential impacts of your credit score, it’s crucial to dispel some common myths as well:
The cost of credit information in India
For consumers in India, accessing their credit information has become increasingly affordable over the years. As of 2023, individuals are entitled to one free credit report per year from each of the four CICs operating in India.
Beyond this, the costs for additional reports vary:
- TransUnion CIBIL: INR 118 for a credit report with a score
- Experian: INR 399 for a credit report with a score
- Equifax: INR 450 for a credit report with a score
- CRIF High Mark: INR 399 for a credit report with score
Many fintech companies and banks also offer free credit score checks, often as part of their customer acquisition strategy.
For lenders, the cost structure is more complex and depends on factors such as the volume of reports requested and the level of detail required. While exact figures are not publicly available, it’s estimated that banks and NBFCs spend a significant amount annually on credit information services.
In summary:
What strikes me most is how rapidly credit awareness has grown in India. With 119 million Indians now monitoring their TransUnion CIBIL scores, it’s clear that we’re witnessing a financial revolution. This surge in awareness isn’t just a statistic – it’s a testament to the growing financial literacy and aspirations of our nation.
Looking ahead, I see immense potential in how technology and innovation will further democratise credit information. The integration of credit scoring with Digital Public Infrastructure and Account Aggregators is just the beginning.
Disclaimer: The above content is for informational and educational purposes only.