Understanding different types of credit scores

The borrower’s credit history and trustworthiness become important criteria that help lenders decide whether to provide him or her with a loan or not when it comes to obtaining a collateral-free loan, whether it be a small business loan or a personal loan. 

The borrower’s credit history is essential in these situations since the lender, whether it be a bank or an NBFC, needs to be confident in the borrower’s capacity to repay the loan in full and within the specified time frame. 

Lenders often use a set of scores to determine a borrower’s creditworthiness. These scores give the borrower a number based on their credit history, past loan repayments, any late payments, and defaults. 

What Is a Credit Score?

 A three-digit figure that represents a person’s creditworthiness is their credit score. A borrower who has a lower credit score may be more likely to miss a loan payment. Contrarily, a borrower with a good credit score is more likely to make timely payments and be financially responsible. 

A borrower’s interest rate and even the size of the loan that the lender may choose to authorize are both influenced by their credit score. The terms given improve with a higher credit score. 

Four credit reporting agencies—TransUnion CIBIL, Experian, CRIF Highmark, and Equifax—offer credit scores in India. These companies’ scores are used by lenders to decide whether to offer a borrower a personal loan or a small business loan. 

For people, credit scores typically range from 300 to 900, and for small businesses, they range from zero to 300. These scores are determined by an algorithm that takes into account a person’s credit history, debt load, and payment history. 

A credit score is often governed by the following factors:

  • Payment history
  • Credit utilization
  • Credit duration
  • New credit enquiries
  • Credit mix

Different credit information organizations are in charge of these scores, which are regulated by the Reserve Bank of India. There are various credit scoring systems and managing companies
in India:
 

• TransUnion CIBIL

It is one of the first credit information companies in India. The CIBIL score that it issues ranges between 300 and 900.

• CRIF Highmark

This credit information company was founded in 2007. The credit scores CRIF issues range from 300 to 900.

• Experian

This global credit information company began its operations in India in 2010. Experian provides credit ratings that range from 300 to 900.

• Equifax

Equifax offers credit scores ranging between 300 to 900.

Why then do we have different credit scores? Depending on the type of loan requested, the amount, and the length of the loan, lenders may be seeking for different forms of information about borrowers. A borrower’s credit history is evaluated differently by different credit scores. 

Additionally, most borrowers take loans for either their own personal needs or maybe small businesses they own. Therefore, different sorts of data points must be analyzed due to the possibility of greatly varying needs. For this reason, several credit scores are required. 

Conclusion

 In order to get the best interest rates and other terms when applying for a personal loan or a small business loan, the borrower must have a solid credit history and, consequently, a good credit score. 

Clients with the strongest credit histories and credit scores often receive the best deals from reputable lenders like Home Credit India. Additionally, lenders place a high importance on these customers and provide them with a wide range of value-added services that can make the entire loan application and repayment procedure simple and easy. 


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