The credit score algorithm now monitors your three-year credit history compared to the earlier two-year period. It also has new credit attributes along with other additional features.
If you love to keep a regular tab on your credit scores released by various credit rating agencies, then you may have noticed a negative revision in the same, despite there being no delay in payments. However, you need not worry as this revision in not caused by you and you are still just as creditworthy as you were last month.
The Credit Information Bureau (India) Ltd, or CIBIL, governs every individual’s credit worthiness based on various factors. Each factor has been given a weightage and then an algorithm calculates your final score which can be anywhere between 300 and 900. Higher the score, more perks you are bound to get. In the recent change of algorithm, there is a more comprehensive structure set to determine your credit worthiness.
In addition to other changes the one that stands out is the change in period being considered to evaluate your score. Instead of the two-year period, that used to be used, the enhanced algorithm factors in a three-year period. Now suppose you have a credit history of two years or say your finances have only recently gotten in order, in such a case, your current score might reduce slightly.
This enhanced algorithm may help in better monitoring of credit history but would imply a reduction in your score, at least for some time. Another addition to the algorithm is through ‘new credit attributes.’ This has been done to assist your lenders to get a better understanding of your spending patterns and behaviour. It would also help in a more accurate calculation of your chances of defaulting on a loan.
Keeping in mind the current scenario of the financial sector, having a tighter check on borrowers has become essential. On the other side, however, a more accurate score might also help lenders open their gates to borrowers they would have once denied a loan to. The new and enhanced CIBIL score is also capable of calculating the score for a person with less than six months of credit history – something that was not possible earlier. This should also help new users to have a better idea about how to maintain a good score at a very early stage itself. The returns of a good start can be huge.
Keeping in mind the young millennials who have only recently started earning and using credit cards, an initial education in the right direction would go a long way. Even though, the nitty-gritties of the algorithm cannot be known, reaching the score above the 800 mark has become tougher. Thus, even if you were to pay your debt completely, you may get till 799, but not an 800.
(The writer is head of research, CapitalVia Global Research Ltd ,Investment Advisor)