Who Will Score The Scorer? - Part 1

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Who Will Score The Scorer?  - Part 1
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At the height of the global financial crisis and even before that, a voice that cut across the globe, a question that often heard was ”Who will rate the rating agencies?” A question that comes to mind, increasingly so, is “Who will score the scorer?”

A credit score is a unique number, typically three digits, generated by a credit bureau based on a complex algorithm which considers multiple parameters such as demographics, credit history, credit mix (unsecured v/s secured), number of enquiries, etc. It is like the proverbial “black box” and not too many people in the industry also know much about how it works!!

Lenders use the score to take credit and risk decisions on your loan / credit card application. In India, the most famous and widely used is the score issued by CIBIL. The CIBIL score ranges from a low of 300 to a high of 900, with 750 seeming to merge as the magic “give or not give” score.

A couple of the other bureaus also issue scores, with different ranges – 0 to 999 for example. Recently, there was a regulatory initiative for all credit bureaus to have the same range so that interpretation and comparison became easier.

Since a score significantly depends on the credit history of an individual, there is a need to ensure that all bureaus have common data from the same set of lenders and probably for the same historical period. Currently, that does not happen in India – different bureaus have different contributing members and also different levels of historical information. For example, my score in one bureau was significantly lower than that in another, only because one of the lenders from whom I had a loan was not a member of one bureau and I had a good payment record with them. Technically, I was, therefore, being penalised for no fault of mine!! The good news – there is a regulatory recommendation under consideration which will require all lenders to provide all data to all licensed credit bureaus.
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Here is another scenario – I have a loan from a lender, who is a member of a bureau and assuming I am not paying on time the lender, rightly so, will report my delinquencies to the bureaus. Now, the lender sells the portfolio to a loan recovery company, which does not qualify as per the law, to be a member of any credit bureau. I now repay the outstanding dues to the recovery company and obtain a ‘no dues’ certificate from them. The problem starts now – who will correct the data in the bureau, which still shows me as a defaulter – not the original lender because it has sold the loan, not the recovery company as it is not and cannot be a member of a bureau and not me, since there is no provision for an individual to correct his data directly. Therefore, my score continues to be negatively affected based on the data available with them.

These are three scenarios which negatively impact an individual’s score for no fault of his! There may be some more, but these represent the issue on hand and leave the score to be less accurate than it should or could be.

While the regulator is trying to address some of these issues, the score continues to be an enigma.

Next week, we will discuss some seeming contradictions in several cases we have come across, which makes one wonder – is the credit score accurate, fair and truly representative of our credit behaviour or is it a simple number with complex algorithms and an over hyped importance.

It is our credit life you are playing with – tread accurately and carefully!
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About the author: Satish Mehta is the founder and director of www.credexpert.in - a credit and debt counselling company that provides end-to-end customised counselling to individuals by handholding them through their credit life cycle.