When you are looking for a new line of credit or new credit card, the banks/finance institutions look for your past financial behaviour to trust you with a new credit facility. The past financial behaviour of individuals is made available to the lenders in the form of credit score/credit report.
1. What is a credit score?
A credit score is a 3-digit number that summarises your credit-handling behaviour in the recent past. The score depends on the information stored in the database of credit rating agencies such as CIBIL, Equifax, Experian, and others. It ranges from 300 to 900. A low score states that an individual is poor in handling the finances, whereas a high score shows that he can manage finances well.
The ideal credit score is considered to be 750; any score above 750 makes it favourable to get a new credit facility. The score computed by CIBIL is called CIBIL score; the one computed by Equifax is known as Equifax credit score. You must know that each credit rating agency has its own set of factors that significantly contributes to computing the score.
2. What is a credit report?
As mentioned above, individual applicants’ credit history is stored in the database of credit rating agencies. This history will be retrieved as a credit report when a lender requests to know about an individual’s past transactions.
When it comes to CIBIL, a credit report for individuals is called the Credit Information Report (CIR) and it is called Company Credit Report (CCR) for companies. You must know that CIR will not contain details regarding savings, investments, or fixed deposits.
3. Is credit score the same as credit report?
A credit score is not the same as a credit report. However, every credit report will contain a credit score, as it is a representation of your creditworthiness in a three-digit number. You cannot use the terms ‘credit score’ and ‘credit report’ interchangeably.
You can only check the credit score without getting access to the entire report. Some credit reporting agencies provide you with this option such as CIBIL.
4. How to read a credit report?
A credit report consists of several sections with various categories of information. Each credit rating agency has its own format. However, here is a general compilation of the sections:
- Credit Score: The most significant part of the report is the credit score. It will be the initial section of the credit report, calculated based on your credit behaviour as specified in the account information and enquiry information of the report. The score ranges between 300 and 900.
- Personal Information: This section states the applicant’s name; date of birth; gender; government ID numbers such as PAN, voter ID, driver’s license, and Aadhaar. It also contains the contact details of the applicant such as telephone number and residential address. Up to four addresses can be held in the section.
- Employment Information: The employment information section contains the details of the employer of the applicant, the monthly/annual income as reported by banks and other related information. This information helps banks decide on the loan amount and the repayment capacity based on the debt-service ratio.
- Account Information: In this section, the details of the availed credit facilities will be available. The section consists of the name of lenders, type of credit facilities, account numbers of each of these credit facilities, ownership details, date of opening these accounts, date of last payment, loan amount, outstanding balance, and more for a period of up to 3 years.
- Enquiry Information: You must know that every time you apply for a loan or a credit card, the bank/financial institute will initiate an enquiry about you. Such enquiries are recorded by credit rating agencies; lenders consider this factor to analyse how desperate you are about taking loans. Multiple enquiries within a short span of time may create a negative image for you.