For processing any type of loan the most pivotal information which any Bank or NBFC seeks is the credit information report of the customer, these reports are being fetched from the credit bureaus. A credit bureau is a company that collects and maintains individual credit information and sells it to lenders, creditors, and consumers in the form of a credit information report(CIR). A credit bureau is generally a warehouse for credit information of all the loan consumers. Credit Bureau collect and maintain records of individuals’ and non-individuals’ (business entities) EMI re-payments of loans and credit cards. These records are submitted to the credit bureaus by banks and other lenders on a monthly basis; using this information a Credit Information Report (CIR) and Credit Score is developed, enabling lenders to evaluate and approve the loan applications. A credit Bureau is licensed by the RBI and governed by the Credit Information Companies (Regulation) Act of 2005. There are 4 credit bureaus in India, CIBIL, Experian, Equifax and Crif Highmark. CIBIL being the oldest among all and the most prevalent for Banks as well as NBFC, though recently RBI has guided all the financial institutions to be member of all the four credit bureaus in order to make transparency in the entire lending process.

How does Credit Bureaus Works?

The credit bureaus gather information about your credit & repayment habits directly from your banks and financial institutions. Every Banks and NBFC have to be the member of these credit bureaus in order to pull the credit history of their prospective customers. These bureaus and the banks have an agreement under which both of them have share the borrower information with each other, The banks and financial institutions takes all the past credit re-payments of the consumer from credit bureau basis which they decide whether to lend or not to lend the customer and they also share all the information of their new customer with credit bureau which further consolidate this customer credit information for future use. For example, let's say you apply for a home loan  and provide the housing finance company with all of your personal information, such as your name and address, your previous address (if any), your employer details, your date of Birth and your Personal Identification number (PAN card number), etc. The housing finance company will then contacts a credit bureau and who intern will provide your credit information report to the finance company. Your CIR will contain all your past performance on your loans with the detail analysis of your re-payment behaviour, your past performance on loan will generate a numerical value basis which the bank will approve or reject your loan application.  If the bank approves your application for a home loan, then the information you've supplied is forwarded to the credit bureau. That home finance company also reports your payment history to the credit bureau, so that it becomes part of the report in future.

Credit Information Report(CIR)

A credit Information report (CIR) is detailed information about a person's or company's ability to pay the loan, this is especially examined by banks & NBFC before they decide to lend money: When we apply for a loan, the lender checks the records held by consumer credit information agencies also know as credit bureaus. The CIR is a month-on-month record of your loan-related EMI payments and/ or credit card payments. It does not include your investment or savings details. Loans include home loans, personal loans, automobile loans and overdraft facilities.

Other information included in a CIR:

• Personal information such as your name, date of birth, address and identification numbers like PAN, passport number, voters number and telephone number as reported by member banks and NBFC.
• Account information such as type of credit availed (various loans, credit card etc), the amount of loan/ credit card limit, outstanding current balance, overdue amount, number of days a payment is overdue, status (written off/ settled), etc.
• Number of Enquiries made by banks about your credit profile- An “Enquiry” is created on your CIR every time the lender requests the credit bureau for your CIR (this usually happens when a consumer applies for loan).

Understanding Credit Scores

    A credit score is a three digit numerical value based on an in depth analysis of a person's past credit performance on the loans he has taken and serviced in the past, it represent the creditworthiness of the person. A credit score is primarily derived based on credit information reports typically sourced from credit bureaus.

The credit Score plays a critical role in the loan application process. When a customer applies for loan – whether for a credit card, an auto loan, or a loan against property – the lenders want to know what risk they are taking by giving the loan to this customer.  And how this customer has performed on the loan he has secured in the past. After a customer fills out the loan application form and hands it over to the bank, the bank first checks the credit score and credit report of the applicant. If the credit score is low, the lender may not even consider the application further and reject it at that point. If the credit score is high, the lender will look into the application and consider other details to determine if the applicant is credit-worthy. The credit score works as a first impression for the lender, the higher the score, the better are your chances of the loan being reviewed and approved. The decision to lend is solely dependent on the lender and credit score does not in any manner decides if the loan/credit card should be sanctioned or not. All the banks and financial institutions including NBFC use credit scores to evaluate the potential risk involved in lending money to consumers and to reduce the potential losses arising due to loans turning bad or NPA. Taking an example of CIBIL,  the credit scores ranges from 300 to 900, The higher the score, the lower the risk. Individuals with no credit history will have a score of -1. If the credit history is less than six months, the score will be 0. But no score says whether a specific individual will be a “good” or “bad” customer. The scoring parameters for all the credit bureaus in India is as under.  

Parameter	CIBIL	Equifax	Experian	Crif Highmark
Scoring system	Individuals are provided a CIBIL score between 300 and 900, with 900 being the best and 300 the lowest	Equifax scores individuals on a scale of 1 to 999, with 1 being the lowest and 999 the highest	Experian scores individuals on a scale of 1 to 999, with scores over 961 considered excellent, while scores below 560 viewed as poor	Crif Highmark scores range from 300 to 850, with a score of 720 and above considered excellent while a score below 640 is considered poor

Banks use credit scores to determine who qualifies for a loan, at what interest rate, and for what loan amounts. Lenders also use credit scores to determine which customers are likely to bring in the most revenue. It’s a vital part of credit health.

What determines the credit score?

A credit score depends on many different kind of variables which affect your determines credit score , but the top most variables are

• Past loan repayment history
• Current credit usability
• Number of credit cards you hold
• Number of secured loans you have
• Number of unsecured loans.
• Demographic variables such as address, age and gender
• Your annual Income.

• Payment history- Making late payments or defaulting your EMIs or dues (recently or consistently) shows you are having trouble to pay your existing credit obligations and will negatively affect your score.
• High utilisation of Credit Limit- While increased spending on your credit card will not necessarily affect your score in a negative manner, an increase in the current balance of your credit card indicates an increased repayment burden and may negatively affect your score.
• Higher percentage of credit cards or personal loans (also known as unsecured loan)-Having a balanced mix between the secured loans (such as Auto, Home loan) and unsecured loan (such as Personal loan, Credit Card) is likely to have a more positive effect on your score.
• Many new accounts opened recently- If you have recently been sanctioned multiple loans and credit cards, then lenders will view your application with caution because this behaviour indicates your debt burden has increased increase, which will negatively impact your score.

Improving and Maintaining your Credit Scores

If you have been rejected for a loan or credit card, there is a high probability that it happened because there is information in your credit information report that marks you as a borrower with low credit worthiness. That is the bad news. The good news is its not the end world and with a small amount of effort you have an opportunity to improve your credit worthiness. For starters, any information featured on your report only stays there for a limited period usually five years or less. So any information beyond that period is replaced by the new information that you add. So start following the tricks and tips mentioned below to start laying the foundation of a good credit score and a blemish-free credit report in the future:

• Ensure your pay your credit card bills and loan EMI on time and in full every month.
• Do not apply for multiple loans and credit cards simultaneously.
• Periodically check your report for mistakes and get them corrected if necessary.
• Keep your debt to credit limit ratio lower than 50% across all credit cards and other loans.
• Ensure that you do not have multiple outstanding unsecured loans/credit cards.

Benefits of a good credit score

  A good Credit score ranges from 700-900. If you have a score of 700 and above, banks and other NBFC’s consider you to be credit healthy. But if you have a score less than 700, banks feel it is a risk to provide you a loan or credit card. Banks and other NBFC’s are comfortable with approving loans to customers who have a score of 750 and above. As per an analysis there is a 80% sanctioning of customer with a credit score of 750 and above.