Insights on Credit Report, Credit Score, and Credit Rating
Credit reports, scores and ratings play crucial roles during loan approval stages. Financial institutions carefully check these to ensure that loan applicants are creditworthy and they have repaid their previous loans on time. Nevertheless, although these terms may appear very similar, they serve different purposes.
Continue reading to find out what credit reports, credit scores, and credit ratings are in reality.
What Is a Credit Report?
A credit report (aka credit information report, credit history or credit file) contains detailed records of an individual’s borrowing and repayment history and personal details. Credit bureaus or evaluating agencies gather and store the financial details of borrowers from financial institutions. After that , these agencies publish all the relevant details in the credit report.
It is one of the most significant documents that lending institutions carefully check before they disburse their credit facilities to customers. It allows them to understand the creditworthiness of their customers.
Include the importance of Credit report
- The Information available on the credit report
The credit report contains several important details of an individual borrower, such as:
|Personal information||In this section, you will get an individual’s personal details like name, date of birth , gender, contact numbers, address, etc.|
|Employment information||This section reflects the income details of an individual as reported by different financial institutions.|
|Credit score||This report also declares the three-digit credit score of a borrower. Details about credit scores are explained further later.|
|Account information||This section contains details of customers’ loans. These include names of their financial institution, types of loans (home loan, personal loan, credit card, etc.), account numbers, account opening date, last payment date, borrowed amount, outstanding balance, repayment frequency, etc.|
|Credit enquiry information||Every time a customer applies for a loan. Their financial institution requests credit reports from the credit bureaus in India. A hard enquiry gets registered in the name of respective customers whenever lenders do this.This section in the report entails detail of these hard enquiries, including the lender’s name, requested amount, type of loan, application date, etc.|
What is a Credit Score?
Credit score can be broadly generalised as the quantified assessment of credit reports. Credit bureaus that make reports of individual customers also provide a three-digit numeric score according to their repayment records. A higher credit score implies that customers have repaid their previous dues in time and are creditworthy for lending institutions.
- Use of credit score
Lenders use this score as one of their eligibility standards for loans, especially for unsecured credit facilities. While approving a loan request, lenders ensure applicants have a healthy credit score. This is why, with a higher score, you can experience instant approval on your loan requests .
- Credit score ranges
You also should know that credit bureaus may differ by the three-digit scoring range. For example, the TransUnion CIBIL comes with a score range between 300 and 900, whereas in the FICO scoring model, this range is 300 to 850. This is why your CIBIL score may be different from your FICO score.
- Understanding credit scores
Here is how financial institutions infer the meaning of your CIBIL scores:
|Range of CIBIL score||Creditworthiness|
Following is how creditworthiness depends on FICO score:
|Range of FICO score||Creditworthiness|
Factors affecting credit scores
The following are different aspects that influence the credit score of an individual:
- Repayment history: Individuals with a positive record of timely repayment get a high credit score. It indicates that they are responsible borrowers.
- Credit utilisation ratio: It refers to the total amount borrowers have used from their predetermined borrowing limit. One should keep this ratio below 30% to ensure their score is not negatively affected.
- Duration of credit history: It refers to the average active period (age) of all loan accounts. With a higher average age, individuals can secure better credit scores. If you deactivate any loan accounts, your credit history’s average duration decreases; your score also gets reduced.
- Credit mix: It indicates diversity in the loan portfolio. Individuals should ideally have secured and unsecured loan types in their credit portfolios. It showcases that they can handle all types of loans properly, and, as a result, credit bureaus reward them with a high score.
- New credit requests: Financial institutions make hard enquiries about their creditworthiness whenever individuals apply for a loan. Bureaus reduce credit scores if they see several hard enquiries within a short period. This is why one should avoid applying for new loans multiple times within small intervals.
What is Credit Rating?
Credit rating indicates the creditworthiness of an organisation, not an individual. Rating agencies use a series of codes to denote the repayment potential of a company. They collect and assess the financial and credit reports and future earning potential, to understand an organisation’s actual economic position and rate it accordingly.
- Use of credit rating
Lending institutions check the credit rating of organisations before providing them with financial assistance. An excellent credit rating ensures that the company is financially strong and has better chances of growth . As a result, lenders get assurance that the organisation will repay their loans positively.
Furthermore, this rating also helps investors to understand a company’s ability to handle its financial risks. If the rating is excellent, they can confidently invest in that company’s stocks. Credit rating basically assesses the risk of lending money to the company, higher the rating lesse the risk of default and vice versa.
- Different credit ratings and their meanings
Following are different credit ratings and what they indicate: Highlight different agencies name add their company initials before the rating.
|AAA||It indicates that the concerned company has an excellent credit portfolio. Include the level of risk|
|AA||The company has a very good credit portfolio|
|A||It is a good rating, and the credit risk of the company is low|
|BBB||It is an average rating and indicates that the credit risk of the concerned company is moderate|
|B||It is a low credit rating and stipulates that the company’s risk of defaulting loan is high|
|C||This is a poor rating and showcases that the chances of defaulting on loans are very high|
|D||The company has already defaulted|
- Factors affecting the credit rating of a company
Here are some of the aspects of a company that the credit rating takes into account:
- Financial history of an organisation: It includes borrowing history, past debts, financial statements, type and level of present loans, repayment history, etc.
- Earning potential of an organisation: Rating companies also evaluate repayment potential, present performance and estimated profits of a company.
- Growth potential of an organisation: Apart from above 2 credit rating agencies also look for the potential growth of the company, experience of its management, its goodwill etc.
Now that you know what credit reports, scores and ratings are, you also need to know which institutions evaluate these.
Credit Bureaus and Rating Companies in India
Here are the different credit bureaus that evaluate an individual’s credit reports/scores:
- TransUnion CIBIL
- CRIF Highmark
Following are different credit rating companies in India that evaluate the creditworthiness of a company:
- Investment Information and Credit Rating Agency or ICRA
- Credit Rating Information Services of India Limited or CRISIL
- Credit Analysis and Research Limited or CARE
- India Ratings and Research
- Fitch India
- Brickwork Rating or BWR
Credit reports, scores and ratings represent the creditworthiness of intending borrowers in different ways. In a credit report, you can find the repayment history and loan-related information about individual borrowers in detail. It also contains three-digit numeric credit scores of borrowers. On the contrary, a credit rating reflects companies’ financial standings in alphabetic symbols with specific meanings.
Frequently Asked Questions
How to calculate the credit utilisation ratio?
You need to divide your total borrowed amount by the total credit limit of all your revolving credit accounts to get this ratio.
Credit utilisation ratio = (Total utilised amount / total credit limit) x 100%
Let’s assume that you have 2 credit cards with a credit limit of ₹ 20,000 and ₹ 30,000, and you have used ₹ 10,000 and ₹ 5,000, respectively. In this circumstance, your credit utilisation ratio will be = (15,000 / 50,000) x 100% = 30%
In general, a low credit utilisation ratio (less than 30%) is considered good for your credit score, while a high credit utilisation ratio (above 30%) can negatively impact your credit score. This is because a high credit utilisation ratio may indicate to lenders that you are relying heavily on credit and may be at a higher risk of defaulting on your debts.
How can I enhance my credit scores?
You can improve your credit score by following the below-mentioned ways:
Paying all the EMIs on time
Refraining from crossing the credit utilisation ratio of 30%
Enhancing the credit mix by taking both secured and unsecured loans as necessary
Requesting for increasing credit limits
How can I get my CIBIL score?
You need to follow the below-mentioned steps to get your credit score:
Step 1: Visit the official website of CIBIL
Step 2: Click on ‘Get Free CIBIL Score and Report’
Step 3: Create your account using personal details and address
Step 4: Log in to the user account