There Is a Big Difference Between Credit Report and Credit Score

This title may seem a bit absurd to you but it is not. Both seem to be similar terms, both are recorded by CIBIL and both are used by lenders to assess your credit worthiness. Yet, there is actually a difference in your credit score and your credit report. It will be easy for you to understand the difference after you have read this article.

Imagine this. You have appeared for an exam regarding your debts taken and how you have used your credit card etc. Your score is the number of marks you have obtained in the exam. Your report gives an account of your performance in words throughout the year, your answers to questions in the exam and also your teacher’s comments. When you apply for a new loan, it is like you have applied for admission to a new institution and the principal of that institution would like to read your previous report card first. She then looks at your score, which are your marks and your answers and teacher’s comments. Based on this she decides whether to give you an admission or not. There could be no simpler explanation than this.

It is true that you may have a score of 700 but your loan application may be rejected due to reasons in your Credit Information Report. While it is important to increase credit score, it is equally important to make sure you have a good credit report backing it.

One of the main difference is that your report contains data for atleast 36 months where as your score is calculated according to past 24 months’ data.

Your Credit Score

Your CIBIL TransUnion Score or, as commonly referred to, your credit score, is a three digit number which is calculated according to a proprietary formula using information given in your credit report under the “accounts” and “enquiries” section. Your credit report is a worded document that holds factual information. CIBIL uses this information to calculate your score. Your score may be anything between 300 & 900. The higher the score, the better it is while the lower the score the poorer it is considered.

Primarily these are the factors that affect your score. They are:

  1. On time Payments: Incase you have a record of always paying your loan instalments or credit card dues on time, then you will be rewarded for your diligent behaviour with a higher score. Details of such payments are recorded in the CIR in a schedule, showing month wise payments you went past due. This schedule is maintained for 36 months.
  1. Unsecure versus Secured Loans: Your score is higher if the fraction of secured loans like home loan or car loan or loan against property, is higher than unsecured loans like personal loan, credit cards or education loans, in your total debt portfolio.
  1. Number of “Hard Enquiries”: Once you apply to use a credit facility, you authorise the lender to withdraw your CIBIL report. Whenever a lender draws your credit report it is termed as a “hard enquiry”. The more the number of such enquiries, the poorer will be your score because it shows that you are constantly in need of more credit and are not able to handle the funds wisely.

A glance at your score is enough for a future lender to make judgements about your credit past. A lower score will make the lender assume that you have not been responsible with your payments, you have more unsecured loans or that you are always seeking fresh credit. How many of such assumptions are true, the lender will find out by reading your report in detail.

A score of “NA” or “NH” means, either your credit history is not six months old or that you have had no credit relationship for atleast the last 24 months.

Your Credit Information Report

This report is the power house of information on your credit history. The CIR records previous information and is periodically updated by CIBIL as per the information received from its members.

  1. Using more credit limit: There is no direct bearing on your score if you use the entire credit limit. But it does impress upon lenders that you may come under huge debt burden by using more credit.
  1. Income to EMI ratio: The thumb rule is that the total EMIs paid by you should not exceed 50% of your Income. Incase you are at a limit of 50% already then lenders will not sanction further loans to you. So even if you apply for a small personal loan and you may have a good score, based on this eligibility criterion, your application may be rejected.
  1. Disputes: Incase you find any discrepancy in your report you can raise a CIBIL dispute. But if you are not happy with your score, you cannot raise a ticket on CIBIL.
  1. Consumer Dispute Remarks: This field has been recently added to the credit report. Here the customer can choose remarks for accounts where a flag has been raised. Such remarks will be available on the report for atleast a year.
  1. Details recorded:
    1. Under the “Accounts” section of your report, the date of last payment, payment frequency (for eg: monthly) and Actual amount paid are recorded for every credit account.
    2. Information about all the loan accounts is maintained under “Accounts” section of your report. Details of total credit limit, sanctioned limit, rate of interest and outstanding balance are all recorded and updated periodically in your credit report. Details of collateral are also recorded in the report.
    3. Information regarding all “hard enquiries” is recorded under the “Enquiries” Section of your report.
    4. Loans on which you are a guarantor, an add-on card holder, status of accounts (closed, settled etc) are all recorded in the credit report.

Summary

The long and short of it is that even if you have a favourable score, you may face a rejected loan or credit card application due to unfavourable factors in your credit report. It is only vital and advisable that you plan your finances in such a way that both the elements are taken care of.

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5 Factors That Determine Your CIBIL Score

No one would want to take any chances when it comes to a credit score. Really, there are no back-door shortcuts for achieving that enviable score. Thus it becomes all the more important for you to understand what factors contribute in the determination of your score so that you can be in complete control of your score and nail it.

Credit score is the first check that a lender does in your background. If you have a low score, then the lender may not consider your loan application any further and reject it right there. But, if you have a high score, the lender may proceed to check further details and documentary proofs before they approve your loan. Since all your financial goals hinge on your credit score, it is in your best interest to take care of it. Ideally a score of 750 or more is viewed favourably by lenders.

Following are listed five factors that are commonly known to affect a score:

  1. Paying dues in time: When you pay your dues, whether your loan EMIs or credit card outstanding monthly dues within the due date, you display financial consciousness and that you are serious about your repayments. To reward your good behaviour, few points are added to your score. With each timely repayment, your score inches upward. On the other hand, if you pay at any time beyond the due date, your payment is marked late. It not only attracts a late payment fee but also thrusts your score downwards. Being consistently on time, helps your score scale higher whereas being late on several occasions serves as a downward force on your score.
  1. Work out your Credit utilization ratio: Whatever credits you have already availed, club together the entire limits available to you across all those credit cards and loans that open and under use. Do not include any closed accounts. Out of this, the percentage being used by you is termed as credit utilization ratio. For example, adding together the “available credit limit” as showing on all your credit card statements and the sanction limits of your loans comes to Rs. 10 lakhs. Out of this you are using only Rs. 3 lakhs. Thus your utilization ratio is 30%. The lower the utilization ratio the better it is from the point of view of a lender.

If you cut down on a credit card or request to decrease your credit card limit, it will bring down your available credit limit. This way even if you don’t increase your spending yet your utilization ratio will shoot up thus bringing down your score. Does this mean you should keep adding more and more credit cards to increase your available credit and keep that utilization ratio at bay? No. Being over exposed to credit makes lenders question why you need so much credit and view you as a person whose hunger for credit is insatiable.

However, if you feel that you need to drop a few cards from your wallet then, don’t let the thought of your utilization ratio keep you from doing so. It’s better to take a temporary hit on your score and work on other ways to improve credit score fast. Ofcourse, you need to plan in advance and make sure you do not apply for any fresh credit for atleast six months after cancelling credit cards.

  1. Credit mix: Lenders are interested in your ability to deal with different types of credit. Having a higher fraction of unsecured debt in your portfolio than secured debt has a downward impact on your score. Unsecured debts like personal loan, education loan or credit cards are those that are not backed with any collateral or asset. They are considered more risky and have a higher rate of interest as premium charged by lenders for bearing that extra risk. Whereas secured debts are like home loan, car loan, loan against property or FD or gold, etc are loans where there is an underlying asset based on which the loan is sanctioned. These are considered less risky since incase of a default a lender can sell the mortgaged asset and recover their money. These do have a lower rate of interest given their less risky nature.

If your portfolio features more unsecured personal loans then you will be perceived as a risky borrower on two accounts:

  1. Since unsecured loans have a higher rate of interest, you already have a surmounting debt and interest burden. Lenders will be sticky here and would not want to invest further with you.
  2. Unsecured loans have no collateral and therefore you may be seeking more loans to settle previous ones as earlier lenders were not able to recover their money.

Once doubt creeps into the minds of lenders, it will be very difficult to convince them of your intent to repay their money.

  1. New applications and subsequently number of enquiries: The moment you apply for any credit facility, even a small personal loan or you ask for a raise in your credit limit, the prospective lender will ask for a copy of your CIBIL report. The more the number of such “hard enquiries” from banks or other lenders, irrespective of whether you are granted the credit or not, will have a direct impact on your score.

What’s more, you will be perceived as a person who is constantly seeking credit for perhaps you are unable to manage your funds and therefore you will be more of a liability to a bank than an asset.

  1. Co-signed or Guaranteed loans: All debt applications co-signed by you, add-on credit cards given to family and also, loans guaranteed out of good faith, appear on your credit report too. Yes, if they are mismanaged then they will have a poor impact on your score and will be treated as good as your own default. Therefore, you should take good care of all those accounts too and constantly follow-up with those who are responsible for making payments on such loan accounts.

In short

Managing credit is no piece of cake but it isn’t rocket science either. The various ways to manage your score are very much within your reach and you can do justice to them by observing credit discipline. If you find it difficult to do it yourself, you must seek help of credit repair companies to do the job for you.

Happy credit to you!

Common misconceptions about CIBIL score calculation

CIBIL or the Credit Information Bureau of India keeps a record of an individual’s credit related activities with all the financial institutions, lenders and banks (including outstanding balances, credit limits, EMI, credit card payments). This record gives an insight into a person’s credit usage patterns. CIBIL generates a three digit number called a CIBIL Score that summarises the credit information and aids in the evaluation of borrowers on a standard scale. Banks check the credit score and credit report to make their credit approval decisions.

As the significance of maintaining a good CIBIL Score is increasing, rampant myths have cropped up which have left people confused. This article attempts to debunk some of the widely spread misconceptions surrounding this financial tool.

Myth #1: Enquiring about your own CIBIL score will bring it down.

When you check your own credit report or score, it is considered a soft enquiry and is not taken into consideration while calculation the score. On the other hand when a lender checks on it for the purpose of evaluating your credibility it is a hard enquiry that gets recorded on the report and impacts the CIBIL score calculation. A series of loan applications in quick succession will generate multiple hard enquiries and have a negative bearing on the score. It is actually a good financial practice to keep a regular check on your score to track your credit health. You can check your score from the bureau by paying a nominal fee.

Myth #2: Close your credit cards to improve your score.

This is the most dangerous myth hovering around the CIBIL Score. Contrary to this belief, closing credit cards will actually bring the score down. When you forgo a card, your total available credit limit declines, and the credit utilization percentage increases. CIBIL score calculation largely takes into account the credit utilization ratio. A high ratio will push your score down.

Length of the credit history is another significant factor that affects CIBIL score calculation. So if you have old credit cards, in which you have displayed good credit behaviour, do not bother closing them. Firstly, a history of payments within the due dates on those cards will positively affect your score. Secondly, they add to the available credit limit you enjoy, and help in reducing the utilization ratio. Hence it makes sense to hold on to such cards, even if you do not use them.

Myth #3: Prefer cash over credit to raise your score.

Indians have grown up with the belief that borrowing money is a bad thing. On those lines they think that if they make cash payments and avoid credit completely it will keep their CIBIL Score in good shape. But contrary to this perception cash transactions do not have any bearing on the CIBIL score calculation. The one and only thing that affects the score is the credit history. If you do not use your credit line you cannot build your credit history and bureaus will not assign you any score at all. You will find it difficult to get loans sanctioned in case you need them for emergencies. The trick is to avail loans and make purchases with your credit cards, and make timely repayments. Such credit behaviour will be rewarded with an excellent credit score.

Myth #4: A bad credit score cannot be restored.

A credit score is a reflection of one’s financial behaviour at a particular point in time. In case you have a bad credit score, it may lessen your chances of loan approval in the near future, but it isn’t a closed chapter. With judicious planning you can get your financial life back on track. Apart from making on-time payments you can take help of professional help from credit management companies who will help you draw out a plan to restore your credit records.

Myth #5: CIBIL score calculation takes into account factors like Education level, Occupation, income, bank balance, place of living and marital status.

None of these factors play any role in calculating your CIBIL score. In fact CIBIL does not even have access to such information. A credit score only reflects how responsibly you handle your credit. It only depends on the credit information like the number of loans taken, total available credit limit, outstanding balances and credit repayment patterns.

Myth # 6: Being a guarantor does not affect credit score calculation.

You will not lose points on the credit score for acting as a guarantor for a loan taken by your friend. But if your friend fails to make timely payments of his debts the onus will lie on you. If you fail to pay the amount your credit score may plummet.

Credit scores affect your financial life significantly. Misconceptions and erroneous understanding regarding CIBIL Score calculation can lead to serious repercussions. Hence it is good to know what affects the score and what does not.

Why You Need to Check Your Credit Report Regularly?

Keeping a check on your credit report is as essential for your financial health as is annual health check-up for your medical wellbeing! Indeed this is very important for managing your personal finances coherently.

When you keep tabs on your CIBIL report, you basically keep tabs on your expenses. You get a snapshot of your financial worth in the form of credit rating and credit score, besides finding out vital financial details such as outstanding account balance, pending credit accounts, credit cards, loans and other bills. This brings out a clear picture of your financial obligations to you. This helps you clearly know your current outstanding and you can accordingly plan for future credit.

You should always check credit report online several times in a year. When you do review the report regularly, you can be rest assured that your report has all the accurate facts and information. There is no discrepancy whatsoever. This saves you from perils of “identity theft” and “raising dispute to improve the score”.

Identity Theft

This is a hideous financial crime against you. You should always be cautious if you spot an unidentified activity or bank query made on your report. In an identity threat someone can use your personal credentials to raise the credit. They may get the loan approved and enjoy the credit while you would be the one who will be liable to pay the dues. If you fail to pay the dues, your credit score will reach bottom soon.

Thus you should always be very careful when you share your personal information with any one. Keeping a check on your credit report helps you identify any nuisance if at all imposed on your name in the credit report.

Identify Disputes

Sometimes your scores fall due to mistakes on your report. Herein you need to raise dispute with concerned authorities and get the correction made as soon as possible so as to improve the score. The sooner the correction is made, the better it is for your credit score. Thus it is very important to keep a check on your report so that any kind of reporting mistake, missed update, or wrong information on your report do not ruin the score for long. As soon as you identify the error, you would get it corrected within 30 days.

There are other benefits of studying credit report as well.

When you regularly monitor credit report you can make sure that your credit score is always positive. With better score you get the confidence for enjoying credit freedom in future as well. That is why your credit score determines your credit freedom. As you are aware of your financial freedom you can confidently contact lenders for the credit and that too, at lower interest rates!

However, if you are looking out to find a loan for low credit score, you again need to monitor your report. By monitoring report, you can correct the bad points in the report and make progress towards credit in future. Checking reports always help you evade bad history and ensure the loan availability whenever desired.

If you do understand your credit report, you can certainly be confident of handling all the disputes yourself, without a professional help. It comes really handy when you want to try different ways to improve credit score yourself. Thus, every person who has a credit history should know how to check free CIBIL report online. One can log on to freescoreindia.com to avail free credit score.

Your report has relevant data about you. It comprises of your loan and credit card repayment details, credit ratio usage, available credit details and every other information about your credit functions. So by monitoring the report you get freedom to analyse your financial obligations whenever you want. This helps you keep track of all due amounts for different kinds of loans and credit cards and take steps to not miss a payment. You can successfully exercise financial discipline by studying your report frequently.

After all, checking credit report is free and you can do so as and when you want. It does not have any negative impact on your rating. Thus always stay informed by checking the report and keep your scores intact.