How do banks determine a good credit score?

Usually, 750 is considered a “good" credit score. But it’s still not a guarantee that lenders and credit card issuers will not reject your application.

“Some lenders or card companies can be conservative. For specific products, they could demand a higher score," said Nikunj Bhagat, senior vice-president, products and innovation, CRIF India.

Bhagat explains with an example: “For premium cards with a high credit limit, a card company can decide to have a higher score of, say, 800 depending on the kind of customer profile it wants to underwrite."

Besides, a lender or a card issuer looks at many other parameters to decide on an application.

A “good" credit score is, therefore, subjective. It depends on the lender, product and the funding requirement of a borrower. As a banking customer looking for the best rates on a loan or a specific credit card, here are a few things that you need to know about credit scores.

Score from each bureau is different: There are four credit bureaus in India—TransUnion CIBIL, Experian, Equifax and CRIF High Mark. Each credit information company (CIC) uses its proprietary algorithm to give credit scores. Therefore, they differ from one bureau to another. However, each CIC gives a score between 300 and 900.

TransUnion CIBIL is more popular among the four, being the first CIC in the country. Many lenders offer their best home loan rates to borrowers with a CIBIL score of 750 and above. Punjab National Bank, for example, has segmented customers in four categories of scores: 750 and above, between 700 and 749, between 650 and 699 and less than 650.

According to its website, the cheapest rates are for those above the score of 750. It charges higher rates to those with lower scores.

Most banks usually use the service of one bureau to evaluate an application for a loan or credit card. But some, which use more than one bureau, correlate scores from different bureaus based on their internal parameters.

Take Central Bank of India, for instance. According to its website, for Cent Home Loans, the bank doesn’t lend to customers with CIBIL and CRIF High Mark credit scores below 675 and Experian scores below 700—a difference of 25 points. For its internal risk rating, there is a similar difference in scores from the three bureaus.

Score requirement differs based on product: A lender’s credit score requirement may differ from product to product. The same lender can have different credit score requirements for auto loans, home loans and personal loans.

“Usually, the credit score requirement for secured products such as home loans is lower than unsecured products such as personal loans," said Pankaj Bansal, chief business officer, BankBazaar.com.

According to Bansal, the lender could even change the credit score requirement based on the funding a borrower needs. Suppose someone needs an auto loan to purchase a car. The credit score requirement would differ depending on whether the borrower needs 40% of the car’s costs as a loan or 85% of the price. In the latter case, the score requirement would be higher.

Lenders also tend to tighten their credit evaluations depending on economic events. Many increased their score requirement last year during the lockdown due to the covid-19 pandemic.

Highest credit score achievable: The perfect score of 900 is rare. According to most industry experts, they are not aware of someone with a 900 score. “Around 850 is considered a near-perfect score. For practical purposes, there won’t be much difference if someone has a score of 800 or 850," said Manu Sehgal, business development leader, emerging markets, Equifax.

Industry experts say that most lenders would offer the same treatment to customers with a CIBIL score of 800 and above. The difference between someone with an 800 or 850 score could be that the latter has a lower credit utilization, or could have a longer credit history, or there has been no recent loan inquiries.