How Does Different Credit Bureaus Work

Before jumping to the main topic, Let’s know that what is the credit bureau? And what mainly does it do. A Credit Bureau is an organization who generates and maintains the credit score and credit report of any individual. These both are nothing but a direct reflection of how credit responsible any individual is. There are various factors which these bureaus determine while generating, updating, and maintaining the score and the report. Various algorithms are working on the credits and the repayments of credits any individual has taken and is repaying. It also majorly depend upon the banks or the NBFCs who update them with anyone’s proceedings of the credits. If in case, a bank or an NBFC fails to do so, it directly affects the score.

Everyone who has dealt atleast once with credit score or credit report knows what do they both mean. A score is a three-digit number between the range of 300-900 which is obtained by calculating various factors and report is the detailed information about the accounts. Where are the credit bureaus and how many of them will know the information? In India, there are 4 credit bureaus viz. TransUnion CIBIL, Equifax, Experian and CRIF HighMark. The first ever bureau was TransUnion CIBIL which was established in 2000 with the association of TransUnion, An America based Credit Bureau. CIBIL stands for Credit Information Bureau India Limited. Over the next few years, other bureaus came and established themselves. In 2010, RBI(Reserve Bank of India) passed a mandate that each and every bank or an NBFC(Non-Banking Financial Company) has to update any information regarding the credits which includes any type of credit card or loan of an individual to the credit bureaus.

Credit score consists of 5 parameters.

• Payment History

• Amount owed

• Length of credit history

• Credit Mix

• New Credit

Check the following table which determines the weightage of each of the above-mentioned parameters in respective credit bureau.

TransUnion CIBIL

Equifax

Experian

CRIF HighMark

In Percentage(%)

Payment History

35

35

35

35

Amount Owed

30

30

30

30

Length of Credit History

15

15

10

10

Credit Mix

10

(Inquiry) 10

15

(Utilisation)15

New Credit

10

(Accounts in Use) 10

10

10

Now, as per the details mentioned above, the 65 percent of any credit score comprises of the payment history as in how responsible the person has been over past years in making the payments of the credits s/he had been taking is considered. The amount owed is how much is the total credit anyone has taken, this includes the credit card limit as well as a loan. And the rest three factors revolve around the total length of credit history i.e. from how long has an individual be taking credits, credit mix i.e. what kind of credits one has. Secured or unsecured and revolving based on fixed credits. New credits are the new type of accounts (not be mistaken by bank accounts) or the credits which one opens. In here, Equifax has a different name as Credit inquiry which is the number of times one has inquired about any kind of loan or a credit card. The loan would be any of the loans like, home loan, education loan, car loan which are basically unsecured types of loan. And the accounts that are in use. Also, CRIF HighMark considers the credit utilization instead of credit mix.

There is no much difference between any of the factors which determine the score. There is hardly 5 percent change. So when the credit score is calculated is more over the same with just 20-25 points change. There can a major difference when a bank would not update any of the bureaus about a transaction. That can happen sometimes, that a particular bank would update the information to 3 bureaus and skips one or there is no tie up with any of the individual bureaus. When anyone checks the detailed report, it can found about which information is missing. Majorly if there is any change, it would be of 50 points maximum and shouldn’t we worry about, as taking the above points into consideration.

But, one should always be responsible for his/her credits and should not take them casually. The weightage may differ in any of the bureaus of the parameter but, an individual’s behavior would make the creditworthiness better or worse. So, one has to be mature enough in taking the credit repayments seriously!

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New updates on credit report and score from the RBI

The concept of credit reports and credit scores has been fast gaining acceptance in today’s financial scenario in India, with all lenders using the model to determine whether to extend credit to a customer, or reject an application for a loan or credit card.

While globally the usage of credit reports has gone beyond financial services and extends to employment and even property rental, in India we continue to use reports primarily when it comes to lending. To this end, the Reserve Bank of India (RBI) has been working on the guidelines that need to be followed with respect to credit bureau products and has been revising them periodically.

India’s first credit information company, or credit bureau is CIBIL, and is the oldest having commenced operations in the year 2000. Subsequently, the other bureaus licensed to operate in the country are Equifax, Experian and CRIF High Mark.

In the nascent stages of credit bureau inception, the Credit Information Companies (Regulation) Act, 2005 (CICRA) was operationalised with effect from December 14, 2006. As per Section 15(1) of the Act, every credit institution had to be a member of at least one credit bureau within a period of three months from commencement of the Act. This applied to cooperative banks as well, as they fall under the definition of credit institutions as defined by the Act. This included data sharing by institutions to the bureaus, as a bureau relies on its members to provide information.

Subsequently, in January 2015, the RBI modified this circular, and as per the revised circular as per Section 15 of the CICRA, every credit institution (Non-banking Financial Companies (NBFCs) and banks included) would need to become a member of all the bureaus and moderate the membership and annual fees suitably. With bureaus dependent on their member institutions for data, there is likelihood that credit history of an individual related to non-member credit institutions would not be reported. This would result in incorrect/ incomplete information across bureaus, and the effective solution to streamline the process would be to mandate membership for all institutions. One-time membership fees to be charged by the bureaus to credit institutions cannot exceed Rs. 10,000 each, while the annual fees cannot exceed Rs. 5,000 each.

With membership comes the question of submitting data to credit bureaus on the part of member institutions. A Committee to recommend data formats for furnishing credit information to credit information companies was constituted by the RBI under the aegis of Aditya Puri, MD, HDFC Bank. On examination of the recommendations of the Committee, it had been derived that increased recognition of credit reports is required, especially by Regional Rural Banks (RRBs), State Cooperative Banks (StCBs) and District Central Cooperative Banks (CCBs), to ensure better screening of loan applicants and usage of credit information reports in credit appraisal. Hence, bureaus would now need to hold regular workshops for these institutions.

Further, the Committee also recommended that RRBs should, as part of their credit appraisal process, have suitable provisions for obtaining credit reports from one or more bureaus so that the credit decision is based purely on information available in the system.

On a related note, the databases currently available with bureaus are not adequately populated with data pertaining to commercial borrowers, and hence member institutions are required to report this data to the bureaus in a timely manner, for bureaus to upload this data within a six-month time frame.

To streamline the process still further, standardisation of data formats had been proposed by the Committee for consumer and commercial borrowers. This would be submitted in a non-proprietary reporting format known as the ‘uniform credit reporting format’. A Technical Working Group would be sent up to regularly review the same and suggest modifications as required. However, those NBFCs registered with the RBI as core investment companies, primary dealers and those solely into investment activities without any customer interface are exempt from this inclusion.

The RBI had also requested for changes in reporting data to bureaus for defaulters (Rs. 1.0 crore and above) as well as wilful defaulters (Rs. 25.0 lakhs and above), wherein additional information regarding the PAN number has to be included.

In conclusion

The RBI has been reviewing and monitoring the usage of bureaus as well as the practices adopted by them and member institutions both. With better governance and uniformity of processes, the road ahead for credit information companies looks positive.