Understanding credit score

One person has one identity. Therefore, your name in all legal records has to be the same, else, there would be complete chaos. This is why your Aadhaar number is unique and remains the same always.
However, in the world of banking and finance, credit score is the real identity of the borrower. And that can vary each time you try to collect a credit score of a person from various sources. To add more to your confusion, the scores sourced from the same bureau may also differ. For an investor considering to put money into loan projects on P2P Lending platforms, this may create trouble. Don’t worry. We will shed some light on the subject.

Let’s understand why the credit score of a person across agencies may differ?

1. Date of the score: When you are comparing the credit scores pulled out from different platforms, the first thing you must know is—whether or not, they are as on the same day. Your credit score may change (and it does) with the passage of time since your credit behavior is not static, although there might be a predictable trend.

1. Scoring models: Different Credit rating agencies use various models. Right, they assess the same person or entity but how do they rate someone depends on what do they do with the available information. While processing the information, different credit rating agencies may assign different weights to the parameters used for awarding scores. Therefore, it’s entirely possible that there is a considerable difference in the credit score of the same person obtained from two different sources.

1. Your record with various agencies might not be the same: Ideally, lending institutions should update all credit bureaus about the credit behavior of a person. For example, if a borrower delays the payment of EMI, the lender shall report this ideally to all credit information companies. In reality, this happens rarely. Because, as per The Credit Information Companies (Regulation) Act, 2005, a credit institution is required to be a member of at least one credit information company. This means it’s not unlawful for any credit institution to report information just to one company. As a result, barring big banks and NBFCs, other financial institutions often communicate only with credit bureaus they are partnered with. In other words, larger the subscriber base of a credit bureau more accurate would be the score. While others would award scores on the old information. This may cause discrepancies in the credit score of a person. What’s more, the time lag in reporting may also affect your score.

Why the credit score from the same agency might vary?
Some self-proclaimed credit management companies provide you with a credit score making you believe that they have sourced it out from the database of a credit bureau. They sweeten their services by offering you free credit report as well. Don’t be surprised if you find any discrepancy there. Many of them use their own scoring models based on the models used by the primary credit bureaus.

It is always a possibility that a credit bureau may refine the scoring model to make the score more accurate. In such a case your new score might differ from the old one, without any change in your credit behavior. This is enough to create confusion among borrowers and lenders. Some credit companies provide borrowers with scores calculated applying the old method, but when a financial institution extracts the score, it doesn’t tally with the one mentioned by the potential borrower. And at times, the difference in these two scores (of the same person sourced from the same credit information company) is high as 100 points—which is unusual even after considering the change in the method.

And here’s a caution

Things get worse when, despite being fully aware of this difference, some P2P platforms indulge in unscrupulous activities. They present scores calculated by the old method as those calculated by the new method. How do they manage this? They only ask the borrower to source a credit report directly from the credit information company. And then use the score given therein to give an impression that they have obtained it directly from the credit bureaus, and is the most comprehensive one.
Ideally, the platforms should do the opposite. They should meticulously cross-check the entire credit report produced by the borrower.

It’s highly misleading, isn’t it?

Suppose a borrower had a credit score of 725 as per the old method and 625 as per the new method. Now, when the score of 725 calculated by the old method is presented as 725 calculated by the new method, lenders on P2P platforms get tricked.
We at, i2iFunding, offer credit analysis in the most transparent way. Our credit evaluation is free of any influence of the borrower and not done with the aim of coaxing lenders on the platform.

Other reasons for the difference in credit score…

Moreover, it is also possible that a credit agency may offer a specific solution as a value-add to meet the requirements of a particular segment of lenders. Do you remember the launch of CIBIL TransUnion personal loan score, which was first of its kind in India? This was aimed at allowing lenders to perform credit assessment with more precision. Your personal loan score and your comprehensive credit score would naturally differ from each other.

Reiteration—your credit score is not stationary. With your credit conduct, it changes too. You can’t change your credit history but can certainly improve your credit behavior in future.

A special note for investors of P2P Lending projects

Don’t blindly depend on a credit score claimed by a borrower on a P2P Lending platform. The Devil always sits deep in detail. Lenders should check the authenticity of the source and its precision. A responsible platform such as ours would go much beyond displaying the official credit score of a borrower.
Please don’t forget credit score is a summary of how a borrower has handled his/her credit so far. It doesn’t account for his/her savings habits, expenditure pattern and his/her overall financial condition, thus, offers no guidance on the future ability of the borrower to repay the loan. Such indicators might be extremely useful in deciding the overall risk involved in the project. A credible platform will examine the bank records of the borrower in detail to verify whether he/she has taken up a loan from any other source that goes unreported in his credit report.
A platform which is not well-equipped to do such thorough assessment in-house may fail to capture the default of a borrower on other platforms.
At present, no rule allows P2P lending platforms to share credit information of a borrower with credit information companies. We, at i2iFunding, have always remained proponents of bringing P2P Lending in the ambit of RBI regulations.
Nonetheless, we are committed to running meticulous checks and getting ONLY genuine borrowers listed on our platforms.