The launch of India's first credit score for individuals, the Cibil TransUnion Score, last week was a landmark event in the country's credit evolution. While the score has been used by loan providers for almost three years, the Credit Information Bureau (India), in an attempt to improve transparency in the use of information during loan evaluations, now provides the score to individuals as well.
CIBIL TRANSUNION SCORE
An individual's Cibil TransUnion Score provides loan provider with an indication of the "probability of default" of the individual based on their credit history. What this means is that the score tells a credit institution how likely is that an individual will pay back a loan (should the credit institution choose to sanction the loan) based on the individual's past pattern of credit usage and loan repayment behaviour.
Given that the Cibil TransUnion Score is a loan-evaluation tool developed to help loan providers, the first logical question that comes to mind is: 'What difference does it make to me'?
The answer is that the higher your Cibil TransUnion Score (ie, the closer it is to 900), the more likely you are to get your loan application approved.
The reason being that a score closer to 900 provides the loan provider more confidence that the individual would be in a good position to repay the loan.
While this is what is claimed, it is always useful to analyse the underlying data, which serve as the foundation based upon which such claims are built.
WHAT DOES THE DATA SAY?
The best way to analyse the impact the Cibil TransUnion Score has on an individual's loan application is to observe the lending behaviour demonstrated by credit institutions over time. The table gives data of loan sanctioned by loan providers based on an individual's Cibil TransUnion Score in 2008 and 2010.
The data tells us that 90% of new loans sanctioned in both 2008 and 2011 were to individuals who had a Cibil TransUnion Score of 700 or more.
However, the data also indicates that over three years, lending institutions preference has shifted from individuals with a Cibil TransUnion Score ranging between 750 and 799 in 2008 to individuals with a credit score of 800 and above in 2011.
Hence, you will have to maintain greater financial discipline to secure credit in future.
It is important to note that loan providers also consider your total income, overall debt burden and how you fit into their internal credit policy before deciding upon your loan application. Hence, if your EMI to income ratio is over the set cut-off percentage, your loan application may get rejected despite having a credit score of 847.
Simply put, the Cibil TransUnion Score is like the marks one earns in school examinations. Higher marks (credit score) increase the chances of your being accepted in a college (getting a loan approved), but they don't guarantee your admission. A more overall evaluation of your extracurricular activities (income level, overall debt burden) is required before you are granted admission.
Similarly, different colleges will have different cut-offs with regards to the marks (credit score) required to gain admission.
