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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Personal credit versus institutional credit

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Credit refers to an agreement wherein a borrower receives something of value (for example goods or a service) with the understanding that the lender will be repaid in the future. When a lender extends the facility, the borrower typically repays the loan with interest.

What is personal credit?

Simply put, personal credit is the type of credit facility extended to an individual. This includes both loans and credit cards. Approval of a personal credit facility to a large extent depends upon the data captured in your CIBIL report and the CIBIL score which is an outcome of complex algorithms based on the data.

Loans provide the option whereby you can borrow money towards purchase of say a house, or a car. There are various types of loans available to an individual, ranging from secured to unsecured loans. Let us take a look at some of these types.

Secured loans: This type of loan requires collateral to be provided against which the loan will be provided by the lender. Mortgages (or home loans), auto loans are the most availed of loans in this category. A security is created against the collateral offered, which is then hypotheticated to the lender until such time that the loan is repaid in full. Typically, the loan is paid off in monthly installments over a period of time.

Unsecured loans: A credit card would be a prime example of unsecured lending. Here, a lender extends credit to an individual without requesting for collateral. The amount due (that is the amount spent) on the credit card has to be repaid at the end of each billing cycle. If you choose to roll over your payment, the card issuer levies an interest charge on the outstanding amount, and hence it is prudent to make card payments in a timely manner. Therefore, it is very important to compare credit card before applying.

Credit cards are of various types ranging from charge cards and globally, store cards.

Another popular type of unsecured loan is a personal loan. Here, the lender extends credit for personal use, ranging from home renovation to going on your dream vacation.

Overdrafts constitute another type of loan, wherein basis a facility provided by your bank, you can withdraw money even once your account balance has gone down to zero. In this option, a limit is set depending on your account history and requirement.

Overdrafts come with an interest rate that can be fairly high and are best used for a short-term purpose.

Loans can also be obtained against valuables such as gold, or assets such as securities (or stocks). These loans are also to be repaid within a specific period of time and come with a rate of interest.

What is institutional credit?

In addition to loans for individuals, lenders also provide loans and overdraft facilities to companies, typically for business expansion. For example, a transport company may avail of a loan in order to increase their fleet of vehicles so that they can cater to a larger geographical reach.

The access to capital becomes critical for an organisation to function, across all aspects of the business.

Long-term loans are among the most popular type of loans made available by lenders to institutions. These serve varied purposes – from expansion of business, acquisition and fulfilling working capital requirements.

These loans are normally at a lower interest rate compared to short term loans and need to be repaid on a monthly basis. Lenders prefer to extend this type of credit to seasoned businesses.

Short-term loans, like the name suggests, need to be repaid in full at the end of the loan tenure. These are used to raise money for short term needs such as purchases to increase inventory.

Credit lines are made available to businesses when they require funds on a need-only basis. For example, working capital finance that a cargo company avails of, to buy a number of trucks.

Given the nature of the product however, these can come at fairly high interest rates and most institutions tend to use them to bridge short-term funding requirements.

The bottom line

Irrespective whether you are an individual looking at credit or an institution, you need to be credit healthy for a lender to extend you the facility. Therefore, it is imperative to maintain a clean or good repayment track record on any existing debt, and make timely payments.

If your credit health needs a boost, consider availing of the services of a credit health management company to understand where you stand, and how you can get stronger.

Why is the CIBIL score different for personal loans?

A personal loan is a quick and relatively hassle-free way to secure funds for an unforeseen emergency that requires funds urgently. The best part about personal loans is that the end use is not defined, and you can use the funds to fulfil (almost) anything you had in mind, from a vacation to home renovation to purchasing a new electronic appliance or jewellery. Of course, the usage cannot be such that it violates any laws, for example using the disbursed loan amount for trading on the stock exchange, or gambling or laying bets.

Once you have identified the need for a personal loan, start shopping – look around for the best deals in the market, primarily in terms of interest rates. While the eligibility criteria for a personal loan may differ from lender to lender, one thing that they all have in common is the requirement of a ‘good’ CIBIL score.

What is a CIBIL score?

A three-digit score that indicates an individual’s creditworthiness, the CIBIL score is crucial when it comes to applying for a loan or credit card. When a lender evaluates your loan application, the first piece of information they look at is this score.

Why is a CIBIL score required?

Typically, a score is between 300 and 900, and higher the score, better are your chances of the application being approved. A lower score may indicate that a person relies heavily on credit to make ends meet, and hence a lender may be reluctant to extend fresh credit, as chances of the loan going ‘bad’ or delinquent are higher.

Factors affecting the CIBIL score

Now that we know what a CIBIL score is, let us look at the factors that affect the score:

  • Timely payments on outstanding dues, be it towards an existing loan EMI or credit card

  • Making complete payments on outstanding bills

  • Non-payment or late payment of bills and EMIs

  • Consistently utilising a high credit limit, i.e. either maxing out on the assigned limit or close to it

  • Regularly paying only the minimum due on credit cards

  • Having multiple lines of credit at the same time, especially if unsecured loans or credit cards

While some of these factors affect the score negatively, others can have a positive impact on your score.

CIBIL score and loans

While CIBIL scores are important for any loan application, they assume special significance in the case of personal loans. This is owing to the fact that personal loans are unsecured products, and is therefore more of a credit risk for the lender.

A lender is more likely to approve a loan application for someone with a higher score, which with CIBIL is normally considered to be 700 and above. A ‘good’ score indicates an individual’s responsible behaviour towards credit, and hence it may be worth lending to such a consumer.

CIBIL TransUnion Personal Loan Score

In addition to the CIBIL TransUnion score that is used by banks and other financial institutions when determining whether to approve a loan application (for example, a home or auto loan), there is also the CIBIL TransUnion Personal Loan score that lays special emphasis on any unsecured loans or credit cards that an individual may have in their credit report.

The repayment behaviour on these loans is carefully studied, and a score is arrived based on the same. The score will provide information on the likelihood of the customers becoming 91 days delinquent on a personal loan. This helps a lender make an informed decision, whether to approve the loan application or not.

How to better your CIBIL score

In addition to using credit wisely and making timely payments, check your credit score regularly. This will help you identify any irregularities in your credit report, and these can be rectified once brought to the attention of the credit bureau.

If you still need assistance to improve your score, consider availing of the services of a credit health management company, who will work closely with you to not only improve your score but enhance it over time.

Do keep in mind that for your loan application to go through, being credit healthy is non-negotiable, and the best time to start is now.

What is better for CIBIL score- Credit Cards or Personal loans?

Credit cards and personal loans are the two most popular types of unsecured debts available out there in the market. While a personal loan is a good way to finance lump sum for your monetary needs like buying a vacation or your favourite gadgets, credit card is more of an ongoing business of taking credit every month and paying it back before due date. It is important to note that both have a due date or EMI / bill payment which should not be missed.

Personal loans are considered the most expensive forms of loans, and yet their interest rates are lower than those of credit cards. The interest rates of personal loans become applicable right from day one, as soon as money is disbursed. It is a short term loan that requires minimum documentation, and once the money is disbursed no-one questions how the borrower has spent it. Thus, a personal loan is a good way to improve CIBIL score if it is low. A borrower can take loan and ensure that he/she pays all the EMIs on time and closes the loan as per agreement. This will create a positive effect on the credit report. The disadvantage of personal loan is that, if the borrower is not able to pay EMI as per schedule it immediately reports as a default in the CIBIL report. This has grave negative consequences. Also in case the borrower is not able to pay the personal loan in full, and goes for a loan settlement, this reduces the credit score. Thus, while a personal loan is a great instrument to get quick finance, it is a two-edged sword that can make or break your credit history.

A credit card on the other hand is an ongoing credit instrument, the biggest benefit being that if you plan your expenses properly according to your billing cycle, you have almost 30-40 days of interest free period wherein to make the payment and pay only the amount that you actually spent. Many credit cards today also offer the facility to convert any big purchase in monthly EMIs for a small charge. Thus it is a suitable credit instrument for person with monthly source of income. All credit cards offer a facility of minimum payment due. If you pay the minimum amount due, it does not show as a default or missed payment in the credit history. But this is actually a trap, because by paying only the minimum due amount, you end up starting interest levy on the outstanding amount immediately. This interest is cumulated on daily basis and can be very high (as high as 35-40%). Thus in the next bill you receive an exorbitant bill amount which may be further beyond your capacity to pay.

Thus, both personal loan and credit card can affect your CIBIL report in positive and negative ways. It depends on the financial needs and financial capacity of individual borrower to take what suits them.