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  • Who issues Credit Ratings or Credit Scores

    If there is one financial product that has redefined the world of financial products, it has to be a credit card. These plastic cards may seem small and compact but contain a whole world of perks and benefits. With the world moving rapidly towards cashless transactions, credit cards are becoming one of those products that are indispensable. Credit cards do not just allow customers to borrow money against a credit and pay for their purchases, but it also provides a number of other benefits and privileges, such as Air Miles, dining discounts, waiver on fuel surcharge, shopping rebates and so on. In short, the importance of a credit card cannot be underestimated.

    The usage of credit cards help to judge the creditworthiness of an individual. Using one of these products judiciously will enable the customer to become a creditworthy person, resulting in his receiving a number of benefits such as loans at low rates of interest. Credit rating companies such as TransUnion and Experian compile credit reports of an individual that has details of his credit score, account information and contact information, among others.

    What is a Credit Score?

    A credit score is a 3 digit numeric representation of a cardholder’s creditworthiness. These numbers range between 300 to 900. The closer the score is to 900, the higher is the cardholder’s creditworthiness. An individual will have to try to stay between 700 to 900 in order to have an optimum credit score. This score is generated by a mathematical algorithm based on the information provided in the credit report and is designed specifically, to predict risk.

    There are numerous models to generate credit scores, but the most common one that is in use is FICO credit score. Three major credit card bureaus generate this score and these three scores are widely used. The bureaus are Experian, Equifax and TransUnion. A credit score is generated based on the following information -

    • History of payments
    • Amount(s) that is owed
    • New credit
    • Types of credit that has been used
    • Length of credit history i.e., time since account activity was started

    The FICO score generated by each of the three bureaus may vary slightly, but usually fall in the same range. Customers are entitled to receive free credit reports but not a free credit score. A small amount must be paid to the credit card bureau by the cardholder to receive his/her credit score.

    What is a Credit Rating?

    An analysis of all credit risks that is associated with a financial entity is known as credit rating. This is given to that particular company or entity based on their credentials, as well as the extent to which their financial statements are sound, based on the lending and borrowing that has been done by the company. This rating is in the form of a detailed report and helps other companies or agencies determine the solvency of that entity. Ratings are published by numerous agencies such as, Moody’s Investors Service, Standard and Poor’s and ICRA, based on detailed analysis.

    Difference between Credit Rating and Credit Score

    A credit score and credit rating is sometimes used interchangeably but there are certain significant differences. These are -

    • A credit rating expresses the creditworthiness of a government or a business whereas a credit score determines the creditworthiness of an individual.
    • A credit rating is expressed in a letter grade format such as Triple-A ratings for those governments or corporations that have a healthy capacity for meeting all financial commitments followed by a double-A, A, Triple-B, Double-B and so on, until D for default. Pluses and minuses can also be added to these ratings.
    • Credit scores are usually expressed in numbers such as Fair Isaac Corporation score or FICO score. These scores are 3 digit numeric representation of an individual’s creditworthiness and range from 300 to 900. The closer the score is to 900, higher is the creditworthiness of that individual.

    Both scores are however, provided by independent third parties.

    Who issues Credit Scores in India?

    The Reserve Bank of India has provided authorization to companies that have registered under The Credit Information Companies (Regulation) Act, 2005 to provide credit scores or ratings based on the past performances that have been reported by numerous member credit institutions and banks. CIBIL or Credit Information Bureau India Limited is India’s leading credit information bureau. Other key players in India are Equifax and Experian. Credit scores are issued by the above three bureaus. The most sought after bureau in India is CIBIL, since it is the oldest player in the country, but lenders also use Equifax and Experian and hence it is mandatory for lenders to provide data to all of the above bureaus.

    A credit score or rating is a direct indicator of the individual’s or company’s credit health. In case a reliable credit rating or credit score is maintained, it makes it easier for them to receive loans and additional credit cards without any hassle and at terms that is favourable to the customer. A good score or rating is an indicator that the individual is a low risk customer which is always an attractive prospect to potential lenders.

    How can Individuals get their Credit Scores?

    Applicants can follow the steps given below to receive their credit scores -

    • They can upload all the required information in any of the three credit bureaus - CIBIL, Equifax and Experian and avail their credit scores.
    • They can also log in to the website of any of the three bureaus and request for the same.

    Having a bad credit score or rating is highly undesirable in today’s competitive economy. Individuals having a low credit score are deemed to be financially very risky and will not be able to receive loans at good interest rates or flexible tenures. Similarly, companies or governments that come with a bad credit rating are seen to be risky and will deter other companies or governments from doing business with them.

    Customers can prevent the above from happening by not delaying their payments, by ensuring that their debts are paid on time and not having too many accounts. Having a good credit score or rating is essential to have a lot more financing options and hence should be given priority by customers as well as companies.

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