People are borrowing money at an unprecedented rate, with year-on-year credit growth surpassing 19 percent in the fourth quarter of FY24, according to a recent report. As borrowing increases, credit scores become increasingly important. Over the past two decades, technological advancements, innovation, and evolving customer demands have significantly altered how credit scores are calculated and what factors influence them.
What are credit bureaus?
Credit bureaus, also referred to as credit rating agencies, are crucial to the financial lives of millions of individuals. They collect and organize information about consumers to produce detailed credit reports. In India, there are four primary credit bureaus: CRIF High, Equifax, TransUnion CIBIL, and Experian.
Can a credit score differ among the four bureaus?
Yes, credit scores can vary between bureaus because each one uses its own algorithms. These algorithms are developed based on their unique data sets and available information, and there is no single correct method for calculating scores. Various scoring methods exist because each score aims to predict the probability of default differently. For instance, one bureau might prioritize Attribute A, while another might focus on Attribute B in their algorithm.
How often can credit scores change?
It is important to understand that a credit score is not a fixed number updated monthly, semi-annually, or annually. Instead, it is calculated dynamically—when you request your credit report or score, it is based on the data available at that exact moment. A credit score can fluctuate due to changes in your credit behavior, such as interactions with credit institutions (like banks and non-banking financial companies), including loan repayments, new loans, defaults, or discrepancies across different credit sources. Any of these factors can cause your credit score to change.
Will inquiries into credit scores affect them?
There is a common misconception that every time your credit score is checked, it negatively impacts the score. However, a soft inquiry, such as when you check your own credit report, does not affect your credit score. In contrast, a hard inquiry occurs when you apply for new credit and a creditor reviews your credit file. Hard inquiries are a routine procedure used by banks and financial institutions to evaluate creditworthiness, such as when a bank considers offering a customer a better financial product. Additionally, individuals might initiate multiple credit pulls for various reasons, including evaluating their own credit or seeking to improve their financial literacy.
Can refinancing or transferring a loan affect your credit score?
Your credit score is influenced by data reported by credit institutions. For example, if you refinance a home loan from Bank A to Bank B, and Bank A fails to promptly report the loan closure to the credit bureau, there may be a delay in updating this information. As a result, both the old loan and the new loan might appear on your credit file, creating the impression of having two active loans. This discrepancy can impact your credit score. Therefore, it is essential to review your credit report after switching loans to ensure that the old loan is marked as closed and the new one is accurately reflected as open.
How is credit utilization assessed?
Credit utilization ratio refers to the percentage of your available credit that you are using across your credit cards and other credit lines, based on the balances reported on your credit report. Generally, a lower utilization ratio is viewed more favorably. For instance, if you have three credit cards and use up 80 percent of the limit on each one, this is seen as high credit utilization by the credit bureau. However, if you utilize up to 80 percent of the limit on just one credit card while keeping the other two cards barely used, this is usually acceptable. This scenario often indicates a preference for one credit card over the others. Additionally, if your total credit utilization across all cards is below 30 percent of your overall credit limit, it typically does not raise concerns.
Credit data should be reported to bureaus more frequently
For an accurate and up-to-date reflection of your credit score—ideally in real time—it’s essential that not only the credit bureaus leverage technology effectively but also that banks and financial institutions promptly transmit data to them. This data should be updated on a weekly or even daily basis. Without such frequent updates, especially in an era of short-term loans such as pay-day, three-day, seven-day, or 21-day loans, the credit score you see may not accurately represent your current financial behavior.
