The Story of Credit Score

    A credit score, the quantified determination of creditworthiness of the borrower in terms of his past credit history, repayment behaviour, utilisation of credit etc. is considered an essential factor for getting a loan from banks or non-banking institutions.

    History of credit score: A sneak peek to the timeline of credit scores

    The concept of credit scores has been with us for quite a few years now. Without a doubt, these magic numbers determine how much creditworthy you are! Thus, from acceptance to rejection of loan applications to determination of lending rates, the credit score certainly plays an essential role. However, have you wondered what happened before the concept of credit scores? How did financial institutions determine your creditworthiness? Have a look! Both the users and banks undergo a credit score check before coming to the final decision. 

     Pre-era of credit scores:  The previous system of acceptance or rejection of application of loan was a biased one and based on the determination of individual judgment. The borrower used to visit the bank branch, and the request for the loan and the lender would provide the loan based on the particular meeting. Thus, there was an error in judgment based on gender, caste, colour or creed. Therefore, as against the earlier system, two statisticians, namely Bill Fair and Earl Isaac, introduced a new method for determining creditworthiness based on statistics.

    The FICO score method: The two scientists, therefore, formulated the Fair Isaac Corporation to devised the process of determining the creditworthiness. The lending institutions took help from these institutions to provide credit to the borrowers.

    As time led, a few more systems came for determining the credit scores, such as the Experion. These systems were an advanced version of earlier methods and thus helped to analyse the credit standing of individuals better.

    The evolution of credit score methods: With the introduction of technology, the online credit scores were the new concepts in the town. Lenders could now easily access the credit reports with the help of technology. Also, it becomes easy for borrowers to know about their credibility while sitting at their comfort zones.

    Also, earlier, there were some refinements made in the system of credit scores. For instance, sectors such as telecom, utility and rent payments were not included in the Credit Scores. The factors for determining the credit scores became far more inclusive and the payments made for paying rent, utility bills also affected the credit scores. 

    Free credit score reports: As per The Fair Credit Reporting Act, 2011, it was proposed that the borrowers had the right to know the reason for rejection of their loan application; thus there was the need to disclose the credit scores to borrowers.

     With the rising awareness and the advanced technology, it thus became possible to get the credit reports at a click of a mouse. The individuals can now keep a regular check on the credit standing by accessing the credit reports. Various online marketplaces allow the credit report check without making any payment. Thus, if there are any errors in the credit report, you can report to the credit rating agency or the lending institutions.

    Major credit rating agencies in India: The four credit rating agencies which are popular in India are:

    •  Experian
    • TransUnion CIBIL
    • Highmark
    • Equifax

    These credit-rating agencies summarize the financial statements from the repayment history of credit cards and loans. For instance, CIBIL or Credit Information Bureau India Limited represents the creditworthiness of the borrower in a three-digit number from 300-900, where 900 is considered as the highest credit score. 

    A credit score is something which is not only limited to insurance firms or lending agencies. Even the landlords and employers can make use of the credit score in a way to figure out how a credit score is being used. 

    Alongside, paying your bills on time, there is another factor which comes into consideration which is called the utilization ratio. How well you manage your credit is a very important point. The credit utilization ratio also adds up into the credit report. 

    The most important point we need to understand is that a credit score is an important factor and we cannot miss it or ignore it. 

    The payment history accounts for 35% of the credit score. Often, people procrastinate and end up prolonging the payment. One of the best ways to deal with this is by setting an automation system. Every month, the amount will get deducted from your bank account. This will ease the system. Not only this, but this will also help to increase the credit score at a higher level. Checking your credit score hardly takes less than 3 seconds. This is the easiest system and easy to handle and carry.

    Thus, it is essential to regularly check your credit score if you wish to avail the finances in the form of a home loan, personal loan or a loan against property.

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