When banks and other businesses takes decision on who will be granted a credit, they have to assess the customers creditworthiness.
In most cases all information on an individuals personal economic situation is not known to the lender unless a bank-customer relationship is already established so this information must be collected from outside sources.
It is time consuming and cumbersome to request information so instead a request is made to a credit bureau.
A credit bureau is a company that gathers publicly available information and make statistical interference about their creditworthiness. The information is then put together in a credit report to which a credit score is assigned.
A credit score is a gradation can be defined as metric to express the risk for an individual or company to default on debt at any time in the future. The credit score is expressed as a number on a scale and it is the most important key figure for credit decisions in most countries in the world.
Credit score in India
CIBIL or Credit Information Bureau Limited is the oldest and most respected credit bureau in India. They are famously known for maintaining and calculate the widely used CIBIL score. While CIBIL is the most popular among the banks there are other credit bureaus in India that also provides credit reports.
Experian
CRIF High Mark
Equifax
Each credit bureau will calculate an individuals credit score based on the information they receive from banks in their network. Since each credit bureau has its own unique model for calculation credit score will be slightly different.
The credit score commonly referred in India as the CIBIL Score, is a 3-digit number that is interpreted to represents how well an individual manages his or her approved loan and credits. Common credits are home or personal loan and credit cards. The CIBIL score is a crucial measure for the lender when they decide who can be approved of a loan.
The credit score is used by banks to assess whether a new customer is likely to be a reliable borrower or a risky one, and the probability that the customer will default on the loan.
When someone applies for a new loan or a credit card a credit report is used to check the customers credit history and other key information in the report.
In India the CIBIL a scale from 0 to 900 is used and the higher the number the better it is. A high number makes it more likely to be approved for a new credit.
A CIBIL credit score of 750 and above indicates good credit worthiness and makes it fairly easy to obtain a loan.
Credit score in the USA
In the USA modern credit scoring models have been used for more than 60 years. The first credit scoring system was created already in 1958 by Bill Fair and Earl Isaac. They called the system for the credit application scoring algorithm which became the first credit scoring system
Banks in the USA soon started to use computers to calculate credit score and began to use it in their work with loan applications. These are the largest credit score systems used today;
- FICO
- CE Score (CE Analytics)
- VantageScore
- Credit Optics (Score SageStream)
In 1989 the now widely used FICO score was first introduced and its most important components have been revealed as the following;
- Payment history (35%)
- Debt burden (30%)
- Length of credit history or “time in file” (15%)
- Types of credit used (10%)
- Recent searches for credit (10%)
Kreditscore in the European union
Since the United Kingdom left the European union in 2020 Ireland is now the only English-speaking country in the group of 27 member countries. There are therefore a multitude of local terms used in the field of loan and credits.
In Sweden for example the localized term kreditscore is widely used by the three leading credit bureaus.
Kreditscore (UC)
Bisnode
Creditsafe
Sweden is a particularly interesting case since the government keeps public records on all economic activities through a personal id number used to easily find out relevant information on an individual level.
If your Kreditscore is good enough it is very easy to be approved for a loan in Sweden and other European countries.