Types of Credit Scores and Its Importance in India

types of credit scores and its importance

types of credit scores and its importance

Credit Scores are generated by significant Credit Bureaus commonly known as Credit Information Companies (CICs). The credit bureaus are financial institutions licensed by the Reserve Bank of India to collect information about a person’s credit behaviour. This information is further used to generate credit reports and credit scores. There are four major Credit Bureaus in India: Experian, Equifax, CRIF High Mark, and TransUnion which generate two main types of credit score models: FICO Score and VantageScore.

4 Major Credit Bureaus in India

 

types of credit scores and its importance

  1. Equifax: It was registered as a Credit Information Company in 2010 and had its headquarters in Mumbai. It collects credit information about a person or a commercial entity and generates reports in a readable format. The credit score ranges from 1 to 999. It also provides risk and portfolio scores, credit fraud reports, etc.
  2. Experian: It was licensed in 2010 and was established in 2006. It analyzes the individual’s credit behavior and generates a credit report. The report is generated within 20 days, and the score ranges from 300 to 900.
  3. TransUnion CIBIL: Credit Information Bureau (India) Limited (CIBIL) was established in 2000 and received its license in 2010. The credit score ranges from 300 to 850. It analyzes and generates reports for individuals and entities and provides Performance scores for companies.
  4. CRIF High Mark: It is the only credit bureau approved to operate in India by India’s Reserve Bank. It was established in 2007 and obtained its license in 2010. The credit rating ranges from 300 to 850.

The above-mentioned Credit Bureaus generate two types of Credit Score models: the FICO Score model and the VantageScore model.

Before going further, let us first look at a credit score and the types of credit scores.

What is a Credit Score?

A credit score typically represents your credit behaviour. Generally ranging from 300 to 900, it indicates creditworthiness and credit history. Lenders often check your score to determine if you can repay the loan on time, and they expect you to have a minimum score of above 750 to qualify for a loan. Therefore, you need to maintain a high score and frequently check it using Buddy Score to track your credit behavior.

Types of Credit Score

The Credit Bureaus generate two main types of credit scores models: FICO Score and VantageScore. These credit score models indicate a person’s financial stability and repayment ability.

Let us look at both FICO and VantageScore models in detail.

Also Read: Know The Difference Between Hard and Soft Credit Inquiry

FICO Score Model

Fair Isaac Corporation first developed the FICO Score model in 1989. Almost 90% of the lenders use the FICO score as a deciding factor before offering credit, and the FICO score is a 3-digit number ranging from 300 to 850. According to this scoring model, having a good credit rating above 750 is considered excellent and helps efficiently get a personal loan at low-interest rates.

Credit Score Table according to FICO Score model

Score Range Credit Ratings
800 to 850 Exceptional
740 to 799 Very Good
670 to 739 Good
580 to 669 Fair
300 to 579 Poor

How does the FICO Score model calculate the credit score?

Percentage (%) Credit Factors
35 percent Payment history
30 percent Amounts owed
15 percent Length of credit history
10 percent Credit mix
10 percent New credit

VantageScore Model

Developed in collaboration with three major Credit Bureaus (i.e. Equifax, Experian and TransUnion), the VantageScore model was created as an alternative to the FICO Score model. The updated or the latest version of this model (i.e. 3.0 and 4.0) has the same range for scoring as the FICO score (300 to 850). Though VantageScore and FICO score gives weightage to payment history, VantageScore emphasizes more on other factors such as credit utilization ratio, credit balance, etc.

Also Read: FICO score Vs. Credit score- What’s the Difference?

Credit Score Table According to VantageScore Model

Score Range Credit Ratings
781 to 850 Excellent
661 to 780 Good
601 to 660 Fair
500 to 600 Poor
300 to 499 Very Poor

How does the VantageScore model calculate your credit score?

Influence Credit Factors
Extremely influential Total credit usage, balance and available credit
Highly influential Credit mix and experience
Moderately influential Payment history
Less influential Age of credit history
Less influential New accounts

Factors that affect your Credit Score

types of credit scores and its importance

Payment History: It is one the most crucial parts of your credit score and accounts for 35% of your FICO score. As a result, it has a significant impact on your credit score. Moreover, the lenders check your payment history to assess your credit behaviour and your ability to repay the loan without defaulting.

Credit Utilization Ratio: The Credit Utilization Ratio shows how much credit you have utilized to your credit limit. If you use your credit beyond the limit, it will negatively affect your score. Hence, maintain your credit utilization ratio below 30% of your income.

Credit Inquiries: Each time you apply for a loan, the lender conducts a credit check to determine your credit score, creating a hard inquiry. The number of credit inquiries is reflected on your credit report and accounts for 10% of the FICO score model. Hence, multiple hard inquiries reduce your credit score affecting your credibility.

Length of Credit History: It accounts for 15% of your FICO score. If you have a long tenure period for your loan and consistent repayment history, your credit score will improve.

Credit mix: It accounts for 10% of your FICO score. Having a diverse credit mix, such as car loans, home loans, credit cards, etc., shows how well you can manage various credit without defaulting. Hence, it also improves your credit score significantly.

Summing Up

A credit score is a deciding factor for applying for a personal loan, and having a high credit rating will help you get personal loans at lower interest rates. Making timely payments and repaying all your past debts can help you improve your credit score. Hence, you can also take advantage of a personal loan using Buddy Loan to improve your score and fulfil your sudden financial needs at affordable rates.