Who Issues Credit Ratings or Credit Scores
The use of credit cards aids in determining a person's creditworthiness. By wisely using one of these products, the customer can establish creditworthiness and gain access to a range of benefits, including loans with low interest rates. Credit reports, which include information on a person's credit score, accounts, and contact details, are compiled by credit rating agencies like TransUnion and Experian.
What is a Credit Score?
A three-digit numerical measure of a cardholder's creditworthiness is called a credit score. These figures vary from 300 to 900. The closer the score comes to 900, the more creditworthy the cardholder is. The best credit score is between 700 and 900, thus one should attempt to maintain that range. This score is produced by a mathematical algorithm that uses the data in the credit report and is especially made to forecast risk.
The FICO credit score is the most widely used of the many models used to create credit scores. This score is produced by three significant credit card bureaus, and these three scores are frequently used. Experian, Equifax, and TransUnion are the bureaus. The following data is used to create a credit score:
- History of payments
- Amount(s) that is owed
- New credit
- Types of credit that has been used
- Length of credit history i.e., time since account activity was started
Each of the three bureaus may provide a slightly different FICO score, but they often fall within the same range. Free credit reports are available to customers, but not free credit scores. The cardholder must pay a minor fee to the credit card agency in order to obtain his or her credit score.
What is a Credit Rating?
A credit rating is an examination of all the credit risks connected to a financial company. This is granted to that specific firm or entity based on their qualifications, the soundness of their financial statements, and the amount of lending and borrowing the company has done.
This rating, which comes in the form of a thorough report, aids other businesses or rating agencies in determining the entity's solvency. Numerous organisations, including Moody's Investors Service, Standard & Poor's, and ICRA, offer ratings based on thorough investigation.
Difference between Credit Rating and Credit Score
A Credit Score and credit rating is sometimes used interchangeably but there are certain significant differences. These are -
- A credit rating expresses the creditworthiness of a government or a business whereas a credit score determines the creditworthiness of an individual.
- A credit rating is expressed in a letter grade format such as Triple-A ratings for those governments or corporations that have a healthy capacity for meeting all financial commitments followed by a double-A, A, Triple-B, Double-B and so on, until D for default. Pluses and minuses can also be added to these ratings.
- Credit scores are usually expressed in numbers such as Fair Isaac Corporation score or FICO score. These scores are 3 digit numeric representation of an individual's creditworthiness and range from 300 to 900. The closer the score is to 900, higher is the creditworthiness of that individual.
Both scores are however, provided by independent third parties.
Who Issues Credit Scores in India?
The Reserve Bank of India has provided authorization to companies that have registered under The Credit Information Companies (Regulation) Act, 2005 to provide credit scores or ratings based on the past performances that have been reported by numerous member credit institutions and banks. CIBIL or Credit Information Bureau India Limited is India's leading credit information bureau. Other key players in India are Equifax and Experian. Credit scores are issued by the above three bureaus. The most sought-after bureau in India is CIBIL, since it is the oldest player in the country, but lenders also use Equifax and Experian and hence it is mandatory for lenders to provide data to all of the above bureaus.
A credit score or rating is a direct indicator of the individual's or company's credit health. In case a reliable credit rating or credit score is maintained, it makes it easier for them to receive loans and additional credit cards without any hassle and at terms that are favourable to the customer. A good score or rating is an indicator that the individual is a low-risk customer which is always an attractive prospect to potential lenders.
How can Individuals get their Credit Scores?
Applicants can follow the steps given below to receive their credit scores -
- They can upload all the required information in any of the three credit bureaus - CIBIL, Equifax and Experian - and avail their credit scores.
- They can also log on to the website of any of the three bureaus and request for the same.
Having a bad credit score or rating is highly undesirable in today's competitive economy. Individuals having a low credit score are deemed to be financially very risky and will not be able to receive loans at good interest rates or flexible tenures. Similarly, companies or governments that come with a bad credit rating are seen to be risky and will deter other companies or governments from doing business with them.
Customers can prevent the above from happening by not delaying their payments, by ensuring that their debts are paid on time and not having too many accounts. Having a good credit score or rating is essential to have a lot more financing options and hence should be given priority by customers as well as companies.
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FAQs on Who Issues Credit Rating or Credit Scores
- Is it possible for an individual to have a credit rating?
Yes, it is possible for an individual to have a credit rating. A credit rating evaluates the credit risk of a potential debtor (a person, a corporation, a firm, or a government), projects their capacity to repay the debt, and makes an implied prediction about how likely it is that the debtor would default.
- How can I obtain an individual credit rating?
You can access the credit scores by uploading all the necessary information to any of the three credit bureaus of CIBIL, Equifax, and Experian.
- Can someone achieve a credit score of 900?
On some scoring schemes, a credit score of 900 is the maximum, but this figure isn't always achievable. At some point, attempting to obtain the greatest credit score is just unrealistic because only 1% of the population can earn a credit score of 850.
- Do credit scores and credit ratings impact interest rates?
When we apply for a loan, one of the most crucial variables that lenders take into account is our credit score. Not just to be eligible for the loan itself, but also for the requirements: Generally speaking, the better conditions and cheaper interest rates you'll qualify for, the higher your credit score.
- How are credit scores and credit ratings used by lenders?
Credit scores are frequently used by lenders to assess your credit risk. Your credit report's data is used to compute your credit score. When granting new or additional credit to a consumer, lenders are typically less risky when the consumer has a higher credit score.
CIBIL Score Requirements for Loans
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