How Credit Score Works?
The credit score essentially, measures, how likely a person is to repay borrowed money. The following points help us to get an overview of how credit scores work:
1. Credit Bureaus: There are Credit Rating Agencies that gather information about an individual’s credit activities from different creditors, banks, and financial institutions. In India, there are four Credit Bureaus, Credit Information Bureau India Limited (CIBIL), CRIF High Mark, Equifax, and Experian.
2. Credit Report and Scoring Models: After gathering all the relevant information, credit rating agencies prepare a credit report of a person indicating details such as credit accounts, payment history, outstanding debts, length of credit history, and any public records (bankruptcies) and use credit scoring models, such as FICO (Fair Isaac Corporation) or VantageScore to calculate credit score. Under different models, different weights are assigned to different factors based on their impact on creditworthiness that helps in calculating the credit score.
3. Credit Score Range: In India, CIBIL is considered the most prominent agency that rates credit scores in a range between 300-900. Higher the credit score, the better the creditworthiness of a person. Generally, a credit score of 700 or more is considered good. however, lenders have their own range of judging the creditworthiness of a borrower.
4. Use of Credit Score: Credit score helps lender to judge the creditworthiness of the client and to calculate the risk of offering loan. On the other hand, client with good credit score enjoys lower rate of interest and favourable credit conditions.
5. Regular Monitoring: Individuals are suggested to monitor their credit scores regularly to check the errors make necessary improvements, and ensure the accuracy of the information on their credit reports.