In India, as financial awareness increases, people are more and more aware of their financial health. In recent years, the number of people seeking their credit information report (CIR) has exploded in many regions and customer segments. Customers are realizing that a good credit history makes it possible to obtain faster loans at milder rates from lending institutions.
Lenders use the CIR during underwriting, which is obtained from a credit information company (CIC). Over the past four years, the number of retail borrowers has increased by 50% and business lines have doubled. In addition, credit bureaus are experiencing strong growth through individual clients who seek their CIR directly from them or through third party partners.
As specialized institutions, CICs collect and store credit information from all borrowers, creating a complete CIR for each borrower. The report contains details on customer loan amounts, payment history, identity, and demographic details. A key component of the CIR is the credit rating. In a nutshell, this report provides information and analysis of a customer’s financial behavior and repayment capacity. The CICs try to further enrich the CIR by using various alternative data such as data on employment, taxes paid, etc. Credit institutions use the credit rating as a criterion for taking out loans and / or for deciding interest rates.
Most credit institutions have evolved their underwriting process using the credit score as a control criterion and have developed their own personalized score, which is a combination of CIR and application data. Unlike NBFCs and other credit institutions, banks have a different underwriting process and, depending on their target customers and risk appetite, they use the different score as a selection criteria. Note that loan decisions are always made by the lenders and not by the CIC.
Decoding credit scores
Numerical score calculated mainly on the financial behavior of a customer and the repayment of previous loans, a credit score makes it possible to assess the repayment capacity of customers and to rank their risk quotient. Other factors affecting credit scores include:
• End use of loans, which provides a general overview of the client’s lifestyle. An asset-based loan (e.g. home loans) is rated higher than unsecured expense-based loans such as personal loans
• Payment history on various loan accounts
• Total borrowings and percentage of available credit used by a client
• Several credit requests in a short period of time
• Joint loan or those where a client is guarantor and repayments are missed
Customers with higher scores are considered low risk, eager lenders to offer loans. Additional benefits of a good score include:
• Access to Consolidated Offers: Customers can choose from a better range of products and offers, including credit cards, mortgages, etc., which can be used as needed.
• Lower interest rate: credit institutions can offer more advantageous rates.
• Higher credit limit: a higher limit or more funding is likely.
Ensuring healthy credit scores
Credit scores will not improve overnight. The different ways to improve credit scores:
• Regular and On-Time Payments: Pay IMEs on time and in full each month.
• Credit Usage Control: This is a percentage of the credit limit used. Low usage is better than full or over limit usage, which negatively impacts credit scores.
• Borrow according to repayment capacity: Borrow according to need and repayment capacity because debt could put customers in difficulty in the event of non-repayment.
• Build your credit history: Having little or no credit history can make it difficult. But these days, credit bureaus also rate new customers or those who have recently taken out loans.
• Close unused accounts: all unused or dormant loan accounts should be closed as and when lending institutions report it to CIC, which impacts credit scores based on credit history. refund.
Always be aware of your financial health and regularly monitor your credit score. Customers can directly access their credit report from any credit bureau (such as Experian, CRIF High Mark, or CIBIL) because regulators allow a free credit report to each individual each year. Free credit reports are also accessible through various third party platforms like Clix Capital, Paisa Bazaar, etc.
The writer is Head of Consumer Products – Clix Capital
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