Thursday, 28 July 2016

Credit Reports v/s Credit Scores: Do You Know The Difference?

We know that when we seek a loan the prospective lender will ask for the applicant’s credit report? However why does the lender not only ask for the credit score only? So is credit report and credit score the same thing? Do you know how to correct CIBIL report and can the CIBIL Score also be corrected? Is it the same as trying correct your CIBIL Score or are these things different? The short answer to the above question is that credit report and credit score are different and while the report can be corrected for mistakes for the score you can only try to improve it which will happen over time. Let us discuss the difference in detail below.

Understanding the Difference Between the Two.

A Credit Information Report (CIR) is a detailed document that contains information not only about various types of loans and borrowing but also details apart from that. The CIR has details about repayment history, various types of loan, loan status, tenure etc. The aforementioned aspects relate to various kinds of borrowings but apart from that also there is a lot of information in a CIR. This information relates to the personal details, contact details, employment details, PAN number etc; how many times a hard enquiry about the CIR is made is also listed in the report. Details about all credit cards, their sanctioned limits, and the status of a loan whether it is standard or is it settled and so on also form a part of the CIR. 
Credit Score is usually numeric but sometimes can be alphanumeric as well. CIBIL score calculation for an individual is based on five factors; these are the repayment history (35%), credit utilization (30%), loan tenure (15%), credit mix (10%) and credit enquiries (10%). Based on the above in the mentioned proportion the credit score is arrived at which is number between 300 and 900.

Sometimes the score can be NA (Not Available) or 0 which means the credit history is less than six months so it not possible to provide a score in the range of 300 to 900. If it is NH or -1 then it means it means there is no credit history thus obviously no rating can be given.

Though above we have discussed a model of score calculation but remember that it is for the oldest credit rating agency for individuals in India. Apart from that there are multiple agencies each with it’s own model of calculation. While the basics remain the same there might be slight difference in the methodology which will make the scores also different across various agencies. The format of the reports will also vary but again the CIRs will also carry almost similar type of information.
The credit score is quantitative and objective while the credit report is more subjective, it gives more detailed and qualitative information that can help the lender assess the applicant better. The score is just a part of the report and the prospective lender will always use the data in light of what is mentioned in report and not in isolation.

The reports do not carry information that can be the cause of any bias, thus information like religion, sex, income; age etc is not included in the report. From an individual’s perspective also it is important that they check the report and not only look at the score. The report offers a comprehensive summary about your debt status and can help in financial planning. 

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