Credit score : History, An Indian Overview & Calculations

In this blog we able to know about the credit score, what exactly the history behind it. Also, Credit score in India and how it calculate?

The use of credit scores as a measure of creditworthiness dates back to the early 20th century. At that time, lenders would often rely on personal relationships with borrowers and their knowledge of the borrower's character to determine whether to grant a loan. However, as lending became more widespread and complex, lenders began to look for more objective and standardized ways to evaluate credit risk.

Source: fico

In the 1950s, the Fair Isaac Corporation (now known as FICO) introduced the first credit scoring system, which was used by several large lenders to evaluate credit applications. The system was based on a borrower's credit history, which included information such as their payment history, outstanding debts, and length of credit history. The FICO score became the dominant credit scoring model in the United States, and is still widely used today.

Over time, credit scoring has become more sophisticated and incorporates a wider range of data, including information from credit bureaus, banks, and other financial institutions. The use of credit scores has expanded beyond lending to include insurance, rental housing, and even employment decisions in some cases.

There has been some criticism of the use of credit scores as a measure of creditworthiness, as it can potentially perpetuate systemic inequalities and disproportionately impact those with lower incomes and limited credit histories. However, credit scores remain a central part of the lending process for many institutions, and efforts are ongoing to make the credit system more fair and inclusive.

In the 1970s, credit scoring became more widespread as credit bureaus began to collect and store large amounts of credit data. The data was used to develop more sophisticated credit scoring models, which included more factors such as the number of credit accounts, the types of credit accounts, and the amount of available credit.

In the 1980s and 1990s, credit scores became increasingly important as the use of credit expanded and the volume of credit applications increased. During this time, credit scoring models were refined to better predict credit risk, and lenders began to use credit scores as the primary factor in lending decisions.

In 2003, the Fair and Accurate Credit Transactions Act (FACTA) was passed, which required credit bureaus to provide consumers with a free copy of their credit report once a year. This helped to increase consumer awareness of credit scoring and the factors that impact credit scores.

In recent years, there has been growing concern about the impact of credit scoring on consumers, particularly those with lower incomes and limited credit histories. Some critics argue that credit scoring perpetuates systemic inequalities and can lead to discrimination. As a result, there have been efforts to develop alternative credit scoring models that take into account a wider range of factors, such as utility and rental payments, in order to provide a more accurate and inclusive measure of creditworthiness.

Credit score in Indian context.

The use of credit scores in India began in 2004 with the establishment of Credit Information Bureau (India) Limited (CIBIL), which was India's first credit bureau. CIBIL was set up as a collaboration between State Bank of India, Housing Development Finance Corporation, and Dun & Bradstreet Information Services India.

CIBIL began collecting credit data from banks and other financial institutions, and used this data to develop credit scores for individual borrowers. The credit scores were based on a range of factors, including the borrower's payment history, outstanding debts, and credit utilization. The credit scores were then used by banks and other lenders to evaluate credit applications and determine the creditworthiness of borrowers.

Since the establishment of CIBIL, other credit bureaus have been set up in India, including Equifax and Experian. These bureaus also collect and analyze credit data to develop credit scores for borrowers.

In 2016, the Reserve Bank of India (RBI) mandated that all credit bureaus in India must provide individuals with one free credit report per year. This helped to increase consumer awareness of credit scoring and the factors that impact credit scores.

Today, credit scores are an important part of the lending process in India, and are used by banks, financial institutions, and other lenders to evaluate credit applications and determine interest rates and other terms of credit. Like in other countries, there is ongoing discussion about the impact of credit scoring on consumers, and efforts to make the credit system more fair and inclusive.

CIBIL- Credit Information Bureau (India) Limited

Credit Information Bureau (India) Limited (CIBIL) is India's first credit information company, established in 2000. It collects credit information from various member banks and financial institutions in India and maintains a database of credit information on individuals and companies. CIBIL's database includes information on credit accounts, payment histories, outstanding debts, and other credit-related data.

CIBIL uses this data to develop credit scores for individuals and companies, which are used by member banks and financial institutions to evaluate credit applications and determine creditworthiness. CIBIL's credit scores range from 300 to 900, with a higher score indicating a better credit history and a lower risk of default.

In addition to providing credit scores, CIBIL also provides credit reports to individuals and companies, which include a detailed record of their credit history, including outstanding debts, payment history, and credit inquiries. CIBIL also provides credit monitoring services, which can alert individuals to changes in their credit history, such as new credit inquiries or late payments.

CIBIL is regulated by the Reserve Bank of India (RBI) and is subject to strict data security and privacy regulations. CIBIL's services are widely used by banks and financial institutions in India, and its credit scores and reports are an important factor in the lending process.

CIBIL's credit scores are calculated using a proprietary algorithm that takes into account a range of credit-related factors, including payment history, credit utilization, length of credit history, and the types of credit accounts a person has. The algorithm is regularly updated to ensure that the credit scores remain accurate and predictive of credit risk.

CIBIL also provides credit scores and reports for companies, which are used by lenders and other businesses to evaluate the creditworthiness of a company. The credit reports for companies include information on the company's financial history, including its credit accounts, payment history, and other financial data.

In addition to providing credit scores and reports, CIBIL also offers fraud detection and prevention services, which help to identify and prevent fraudulent credit applications and other forms of financial fraud. These services use advanced data analytics and machine learning algorithms to detect patterns of fraudulent activity and help prevent financial losses for lenders and other businesses.

CIBIL's services are widely used by banks and financial institutions in India, as well as other businesses that require credit-related information for their operations. CIBIL's credit scores and reports are an important factor in the lending process, as they help to evaluate the creditworthiness of borrowers and determine interest rates and other terms of credit.

CIBIL has played an important role in the development of India's credit industry and has helped to promote responsible lending practices and financial stability.

Calculation of Credit score by CIBIL

CIBIL calculates credit scores using a proprietary algorithm that takes into account various factors related to an individual's credit history. Some of the key factors that are used to calculate CIBIL credit scores include:

Payment history: This includes information on how regularly a person has made payments on their credit accounts, and whether they have missed any payments or made late payments.

Credit utilization: This refers to the amount of credit that a person is currently using, as a percentage of the total credit available to them.

Credit history length: This refers to the length of time a person has been using credit, with longer credit histories generally indicating greater creditworthiness.

Types of credit: This includes information on the different types of credit accounts that a person has, such as credit cards, personal loans, and home loans.

Recent credit inquiries: This refers to the number of times that a person has applied for credit recently, with frequent credit inquiries generally indicating a higher level of risk.

CIBIL uses these factors to calculate credit scores that range from 300 to 900, with higher scores indicating greater creditworthiness. A CIBIL credit score of 750 or above is generally considered to be a good score, while scores below 600 are generally considered to be lower and may lead to difficulty in obtaining credit.

Here are some examples of how credit-related factors might impact a person's CIBIL credit score:

Payment history: If a person has a history of making late payments or missing payments on their credit accounts, this is likely to lower their credit score.

Credit utilization: If a person is using a high percentage of their available credit, this can indicate a higher level of risk and may lower their credit score.

Credit history length: If a person has a long history of using credit responsibly, this can help to increase their credit score.

Types of credit: Having a mix of different types of credit accounts, such as credit cards and loans, can help to increase a person's credit score.

Recent credit inquiries: If a person has made a large number of credit inquiries recently, this can indicate a higher level of risk and may lower their credit score.

Overall, it is important for individuals to maintain a responsible credit history, with timely payments and low credit utilization, in order to maintain a good credit score and improve their creditworthiness.