Credit scores depend on how promptly you repay your loans. What if they were also to consider how promptly you repay your bills?
Beginning this year, the Reserve Bank of India has made it mandatory for each credit bureaus in India to give one free credit report a year to every consumer who requests one. (You can read about it here.) This was done to make people more aware of their credit health. Following this move, many online financial services aggregators tied-up with credit bureaus to provide consumers their credit scores and reports. The catch here being that you would have to share your personal information, which could later be used for targeted marketing campaigns (read about it here).
Currently, a host of factors impact your ability to take a loan. It is common knowledge that your financial behaviour on existing loans can impact your future ability to take a loan. However, the role alternative data—apart from financial behaviour—in this process in being discussed increasingly, especially at the regulatory level. This could mean that your social media data, the monthly telephone and utility bills, even annual insurance premiums could impact your credit history. However, most people only get to know about their credit scores or credit health when they approach financial institutions for loans.
When you apply for a loan (or credit card), the lending institution approaches a credit bureau to understand your credit worthiness. “However, these scores are solely based on a few underlying data parameters—repayment history on loans and credit cards," said Rajiv Raj, co-founder and director, CreditVidya, which is working on assessing credit worthiness of individuals through non-traditional means. Currently, “Only transactional information on loans and credit card repayment is reported to the credit bureaus.... If you default on a payment—EMI or a credit card bill—it will have the biggest negative impact on your credit score," said Manu Sehgal business development leader, emerging markets, Equifax India. Even if you don’t default, delays in paying EMIs or credit card bills will also impact your credit score negatively.
The amount of credit you utilise also plays an important role. For instance, if your credit card’s limit is Rs1 lakh and you often use Rs95,000 of it, it means you are maxing out your credit constantly and it will impact your credit score negatively because it would be assumed that “you do not have any more capacity to take debt," Sehgal said. Your credit score will be impacted negatively if you keep applying for loans because it would be assumed that you are in some financial stress, added Sehgal.
Given the young demographics of our country, about 80% of the population has never taken a loan and hence does not have a traditional credit score, Raj said. “In countries like the US, alternative credit scoring companies identified this gap and started using information such as telecom data, social media usage patterns and utility payments...(to) determine the creditworthiness of individual consumers," he said.
There are regulations in some countries that bring reporting of these bits of data into the ambit of credit reporting. For example, in the US if you do not pay a telephone bill on time, that is something that a bureau will report on, said Mohan Jayaraman, managing director, Experian Credit Information Company of India Pvt. Ltd. “Many countries do this, it is also on the radar in India. It has been discussed multiple times but the underlying process is long and complex. This will happen over time," Jayaraman said.
Majority of young Indians do not have a formal credit history, but they do have a record of using telecom services, which could help them establish their credit worthiness. “The point to note though is that, is all of this reporting positive for a good consumer? In the Indian market, the argument is that there are a billion consumers who have a telephone record, but only a few million consumers who have a credit card or a loan. If we get telecoms to start reporting to the bureaus, you will start getting records of an additional 700 million consumers. In most of these cases, 95% of the consumers will get the benefit of positive track records. That’s a good thing for the country," Jayaraman said.
However, using social media data may not give very good results in India, currently at least. The data from social media profiles and activities of individuals is used mostly to verify the identity of applicants, their level of education, place of work and job stability. “Social media activities can help alternative-lending platforms identify potential borrowers who do not have easy access to credit through traditional lenders. In India, the data from social media is weak when compared to Western countries, thus it could be less predictive," Raj said.
Even the credit bureaus have examined social data and found it to be very weak, Jayaraman said. “A lot of alternate data...around us may be huge amount of hype and very little reality. It is fashionable to talk about alternative data for credit decision making. But we find that there are very few reliable data sources," he said. “Someone who is socially active and has a good network does not necessarily translate into a good credit taker. Also, this whole flow of information is owned by a certain set of companies and there are a lot of legal safeguards that prevent someone from accessing it. There is a whole legality issue," he said.
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