Don't be shocked if you find that your credit score from TransUnion Cibil has fallen between January 2020 and now. The credit information company (CIC) has changed the way it scores borrowers and cardholders. Due to the new scoring system, credit scores of many could have reduced since the beginning of the calendar year.
In January, out of the total consumers, 60% had a score of 775 or more, according to data from TransUnion Cibil's website. Now, only 37% of consumers have a score above 765. "We launched a new scoring system recently. It is nuanced and works on credit data of 36 months. Earlier, we looked at 24 months of data when scoring customers," said Rajesh Kumar, MD and CEO, TransUnion Cibil. It is the third version of Cibil's CreditVision score.
Customers, however, don't need to worry about the drop in their scores. It will not lead to rejections by lenders. As Cibil has implemented a new scoring mechanism, the CIC has worked with its member banks and non-banking financial companies (NBFCs) to change their lending policies accordingly. "We have lowered our credit score requirement after adopting the new scoring mechanism. We analysed our portfolio to see the difference between the new and the old scores. Accordingly, we changed our lending policies," said a general manager—retail banking with a public sector bank, who didn't want to be named.
To illustrate the change, the banker gave an example. "If we accepted the lowest score of 724 in the earlier version, we now accept a score of 701," he said.
There could be a difference between the old and the new scores as the algorithms have changed. As a result, even with exactly the same data, your credit score can drop.
According to Kumar, TransUnion Cibil launched a new scoring mechanism due to various reasons. Technology that can crunch volumes of data and do the computations that Cibil needs is more accessible now. Consumer behaviour is also changing. Increasingly, people are going for consumption loans such as personal and consumer durable loans.
Spending on credit cards, for example, is growing faster than the growth in the issuance. Between December 2018 and December 2019, the portfolio outstanding grew 44%, whereas active card users grew 25%, according to data from the credit bureau CRIF High Mark.
Scoring borrowings on 36 months of data, instead of 24 months, allows TransUnion Cibil to come up with sharper insights. A bureau uses multiple parameters and complex algorithms to come up with a credit score. A few parameters on which credit score is based include the payment history, credit utilisation, credit mix—secured and unsecured, and enquiries.
Looking at data over a longer period helps to provide a more comprehensive picture of consumers' credit behaviour. The new mechanism also includes variables such as long-term trend of outstanding balances, transaction history on credit cards, the ratio of repayment to the total amount due, and the number of new accounts opened and closed, according to the TransUnion Cibil website.
In the earlier scoring mechanism, consumers had to build six months of credit history before they could get a score. The new mechanism scores consumers with less than six months of credit history as well.