Policies, Codes & Other Documents
Data-driven lending is the process by which a lender combines various digital datasets to understand the borrower profile and associated risks. This will allow the lender to make an informed decision and tailor lending solutions to fund creditworthy customers. And one of the crucial data points assessed by lenders before making lending decisions is the credit score.
Credit bureaus calculate individual and company credit scores by consolidating data about the history of a borrower’s repayments, lawsuit verdicts, and pertinent financial information. The rating is updated monthly to reflect the borrower’s payment history accurately.
Credit scores vary between 300-850. Lenders consider this score a pivotal variable and a true reflection of the risk of lending to a borrower. The credit score is based on: number of loans, the total amount of borrowings, and repayment track record. Lenders use credit history to evaluate the lending risk by considering the chances of an individual repaying loans promptly. At Tata Capital, we offer several instant hassle-free customisable loans online using just the credit score and KYC documentation.
Lenders use various parameters while underwriting the risk associated with lending to a borrower, such as a repayment history, total debt owed, debt to equity ratio, market standing, trade reputation, supplier relationships, customer equity, and many more. A credit score helps clarify a lot of these variables for underwriters.
Since lenders report late payments or missed payments to the Credit Information Bureaus, the credit report reveals the default amount and days the account was outstanding. These defaults can impact borrowers’ overall credit score for years.
If the borrower is a serial defaulter, their credit score will reflect a lower number accounting for the missed payments. Timely payments of interest and the principle will positively impact the borrower’s payment history. If the borrower pays all the bills on time and much before the due date, the credit history reflects a clean payment track record, which will help boost their credit score. The factors affecting the credit score and their weightage are -
As the common saying goes, “If a friend has a reputation for not paying anyone back, you wouldn’t want to lend them any money.”
The payment history accounts for the highest percentage in the credit score. Types of account considered for credit history include:
It’s not just the delayed payment that’s taken into account. Several factors are considered along with a late payment that impacts credit scores, such as:
Additionally, the penalty for a delay by credible borrowers is higher than delinquent borrowers. For example, when the credit score is 780 (on a scale of 300-850), 30 days payment delay could drop the credit score to between 670 and 690. If the credit score was is 680, 30 days late payment could drop the credit score between 600 and 620.
The better the scores before a late payment or any other adverse credit event, the lower the scores because borrowers with higher credit scores are not expected to pay late. Whereas for a borrower with a lower credit score, the risky behaviour is already factored in.
Borrowers can improve upon credit history and credit scores with these few steps -
The bottom line is credit history plays a crucial role in lending decision-making. By building a solid payment history, borrowers can assure lenders of their intent and ability to service loans. In a data-first world, credit history will soon determine future borrowing capacity. Reach out to Tata Capital to know more about your credit eligibility and accessible loan offerings.
Policies, Codes & Other Documents