• THE OUTSIDE VIEW
  • OCTOBER 31, 2012

Know Your New Credit Score

Individuals today have more life goals than our parents or grand-parents did - we want to take domestic or foreign holidays annually, buy our dream homes faster, we want to retire young and rich, and many more such goals.

While a generation or two ago, people would wait until retirement to save enough of a corpus to buy a house, now people as young as in their late 20s are opting for home loans, backed by their salaries and their long available repayment horizon. Often these people are completely new to credit.

Because of this shift in credit taking behavior, from what was earlier credit cards and personal loans of relatively smaller amounts, to what is now auto loans and home loans which are comparatively larger amounts, and the fact that credit off take is increasing for a younger audience as well, it became necessary for lending institutions to revamp the original credit score to factor in an audience that was taking a large loan, without ever taking a loan before.

It is difficult for a lender to assess the risk posed by a borrower having no or minimal borrowing history, as is the case with many new borrowers, regardless of their age. And when the borrower is opting for a significant loan such as a home loan, or even a car loan, it is important for the lender to be able to assess the safety, or lack of it, in providing the funds.

For this reason, CIBIL and TransUnion have just this month released the CIBIL TransUnion Score 2.0, a new, improved version to the already existing CIBIL TransUnion Credit Score. The new score 2.0 will not be available to individuals yet, for now it is only available to credit institutions, as they provide information to banks.

What is the CIBIL TransUnion Score 2.0?

The CIBIL TransUnion Score 2.0 is basically a number which is calculated on the basis of certain parameters from your credit history. This number is a quantification of the risk you pose as a borrower, of defaulting on a loan.

What does the CIBIL TransUnion Score 2.0 do?

Firstly, it enables banks to make smarter decisions when lending to borrowers who have limited credit history (less than 6 months), by scoring them on a risk index. As someone who is new to loans, you can be classisifed as high, medium or low risk, on a scale of 1 to 5, 1 being the poorest score and 5 being the best score i.e. you pose the least risk of default.

A score of 1 or 2 means you are a high risk borrower, a score of 3 is medium risk, and a score of 4 or 5 means you pose low risk as a borrower.

You may even have a score of -1. This is for people who have no prior loans at all.

Specifically, you will get a score of -1 if you:

  • Have no loans / credit facilities and are not reported on the CIB (Credit Information Bureau)

  • Have no loans / credit facilities and have only been enquired upon by a lender (for example, when you apply for your first loan)

  • Have loans / credit facilities as reported by CIB, but all have been closed within the last 24 months, and finally

  • Have loans / credit facilities but none have been reported in the last 24 months

Secondly, it also applies to people who are not new to credit. So if you have a credit history of more than 6 months, you will be scored between 300 and 900, 300 being very high risk, and 900 being the lowest risk of default.

How does this affect people who already have an old CIBIL score?

If you already have an old CIBIL score, your score will be lowered a bit. this is not a cause for panic. It simply means your score is being recalibrated to comply with the new scale. The representative value of risk you pose as a borrower does not go up or down, it stays the same.

The parameters for risk calculation remain as before as well: they will check for credit seeking activity, delinquency, demographics, and type of credit you are taking.

Conclusion

Safe debt can be a great way to build wealth to achieve your life goals such as your retirement, your child's education and so on.

With a more fine tuned means to determine whether you are a safe borrower or not, it will be easier for the safe borrowers to get loans and also use their credit scores as bargaining tools for better loan rates and waiver of loan processing fees.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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