How do banks determine good creditworthiness?
Usually 750 is considered a “good” credit score. But there is still no guarantee that lenders and credit card issuers won’t refuse your application.
“Some lenders or card companies can be conservative. For certain products, they might ask for a higher score, “said Nikunj Bhagat, Senior Vice President, Products and Innovation, CRIF India.
Bhagat explains using an example: “For premium cards with a high credit limit, a card company can opt for a higher score of 800, for example, depending on which customer profile it wants to draw.”
In addition, a lender or card issuer looks at many other parameters in order to decide on an application.
A “good” credit rating is therefore subjective. It depends on the lender, the product, and a borrower’s funding needs. As a bank customer looking for the best interest rates on a loan or specific credit card, here are a few things you need to know about credit scores.
The score of each office is different: There are four credit bureaus in India – TransUnion CIBIL, Experian, Equifax and CRIF High Mark. Each credit information company (CIC) uses its own proprietary algorithm to generate credit scores. Hence, they differ from one office to another. However, each CIC gives a score between 300 and 900.
TransUnion CIBIL is more popular among the four as it is the first CIC in the country. Many lenders offer their best mortgage rates to borrowers with a CIBIL score of 750 and above. For example, the Punjab National Bank has divided customers into four categories of scores: 750 and more, between 700 and 749, between 650 and 699 and less than 650.
According to its website, the cheapest rates for those above the score are 750. It charges higher rates for those with lower scores.
Most banks typically use a single agency to review a loan or credit card application. However, some using more than one office correlate the results of different offices based on their internal parameters.
Take the Central Bank of India, for example. According to its website, the bank doesn’t lend Cent Home Loans to customers with CIBIL and CRIF High Mark credit scores below 675 and Experian scores below 700 – a difference of 25 points. In terms of internal risk ratings, there is a similar difference in the ratings of the three bureaus.
The score requirement differs depending on the product: A lender’s creditworthiness requirements can vary from product to product. The same lender can have different credit requirements for auto loans, home loans, and personal loans.
“Typically, the credit score for secured products like home loans is lower than unsecured products like personal loans,” said Pankaj Bansal, chief business officer, BankBazaar.com.
According to Bansal, the lender could even change the credit rating requirement based on the funding a borrower needs. Suppose someone needs a car loan to buy a car. The creditworthiness requirements would be different based on whether the borrower requires 40% of the cost of the car as a loan or 85% of the price. In the latter case, the score requirement would be higher.
Lenders also tend to tighten their credit ratings depending on economic events. Many increased their score requirement last year during the lockdown due to the Covid-19 pandemic.
Highest achievable credit rating: The perfect score of 900 is rare. According to most industry experts, they don’t know anyone with a score of 900. “Around 850 is considered a near-perfect number. As a practical matter, it doesn’t make much difference whether someone has a score of 800 or 850, “said Manu Sehgal, director of emerging markets business development at Equifax.
Industry experts say most lenders would offer the same treatment to customers with a CIBIL score of 800 and above. The difference between a person with a score of 800 or 850 may be that the latter has lower credit utilization, has a longer credit history, or has not made any credit inquiries recently.
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