Why Decoding Your Credit Score Is Becoming Important

Over the past year, you will have seen a meteoric increase in companies asking you to check your free credit score and report. This can be confusing - sometimes the text message or email you receive simply tells you to check it, without explaining what it is or why it is important.

So, what are credit scores and reports?

Let’s start with the credit report. Your credit report is a historical record of how consistent you have been with paying your debt obligations. These include credit cards and any type of loan, for example,  personal, auto or home loans and overdrafts. Often people don’t realise that buying a mobile phone on instalments is technically a loan and therefore can affect your credit report.

Your credit score is a 3-digit summary of your credit report. Think of it as an easy-to-understand number that helps you comprehend the strength of your financial standing, as proven by your report. Your credit score will typically range from 300 to 900. The higher your score, the better your eligibility for cheaper deals and interest rates on finance.

How are they created?

Your credit score and report are pulled together by a credit bureau. Credit bureaus collate all your payment information from banks and lenders, and merge the data to create your credit report. This historical record is used to create your credit score. Typically, 2 years of credit data is required to be able to create an accurate credit score.

There are four of these bureaus in India: TransUnion CIBIL, Equifax, Experian and CRIF Highmark – we work with Experian. There was a time when India had a dominant first mover – CIBIL – who had the most comprehensive credit data. This allowed CIBIL to create an accurate credit score. The playing field was levelled in 2015, when the RBI directed all lenders to submit data to all credit bureaus. Given that the same data is available across all bureaus, Experian, Equifax and CRIF Highmark are now also able to provide you with an accurate credit score. 

Since different credit bureaus offer slightly different credit scores, it might help to understand what constitutes a “good” score:

CIBIL credit score: 750+

Experian credit score: 780+

Why are they important?

Your credit score and report are important for two reasons:

1. They are used by lenders to evaluate your loan and credit card applications. In a nutshell, your access to money to buy a home, a car, pay for your child’s education or medical expenses of a loved one, are all contingent on this data. Loan approvals tend to be faster and (hopefully) hassle free if your data is accurate. Inaccuracies can mean nasty surprises in terms of loan rejections, especially when funds are needed quickly.
2. In 2017, some lenders started offering lower interest rates to people with higher credit scores. A reduction of just 1% on the interest rate on a 15 year home loan could mean paying one year less of EMIs!

Where can you get your credit score and report?

Previously, people were required to pay for their credit score and report. But 2017 was a defining year for credit reporting companies in India. Not only did the RBI make the progressive move of directing all credit bureaus to provide free credit scores and reports to consumers annually, but FinTech firms also started offering them. So you now have free access to your credit score and report, forever.

Given the importance your credit score and report hold in your life, it’s hugely important to monitor them regularly. Ensuring that the financial reputation you have built up over years of effort is accurate is crucial – it will affect your ability to access credit in the future, and at what cost, after all. And now that it’s free to check your score and report, why wouldn’t you?