A FICO score is a credit risk measurement tool. It is developed by Fair Isaac Corporation. It is a tool which summarizes an individual’s repayment behavior and it is primarily based on their credit history.
It is important to acknowledge that the FICO score is not used extensively in India like the CRIF High Mark credit score. Still, it is consistently making inroads into the Indian lending market.
It is a three digit number and typically ranges from 300 to 850. It gives a clear direction to lenders about the creditworthiness and credit scores of borrowers.
Why does it matter in India?
- Assessment of creditworthiness of individuals: On similar lines to CRIF credit scores, FICO scores enable lenders to quickly and consistently determine whether to lend money to borrowers or not. A higher FICO score indicates a lower credit risk. This number hence influences the loan amount, repayment tenure and interest rates offered.
- Aims at expanding credit access: FICO score also uses non-traditional information such as social media activity, digital footprints among other traditional things to assess credit risk of an individual. This approach allows lenders to tap into a larger segment of the Indian population with limited or no formal credit history. It also helps in promoting financial inclusion.
- Global financial perspective:Â Understanding the FICO score is crucial, because it is also used widely by US lenders. The FICO score hence can provide a global benchmark for lenders to judge the borrowers creditworthiness from, as this tool is extensively used by lenders in the US.
What are the factors that influence an individual’s FICO score?
Now there are several factors that can influence an individual’s FICO score. These can be broadly classified as follows:
- Payment history:Â It basically reflects on time payments on credit accounts. It has a weightage of about 35% in determining one’s FICO score. A more seamless repayment history results in a better FICO score.
- Owned amounts: This is another important aspect to be considered and has a weightage of about 30% in an individual’s FICO score. Here, the amount of debt relative to available credit is considered. Focus here is, the lesser the debt on an individual the better it is for their FICO score.
- Length of credit history: Credit history is another important factor to consider while computing the overall FICO score of an individual. For example the length of credit card usage. It has about 15% weightage in an individual’s FICO score. The longer and unblemished credit profile of an individual the better it is for this metric.
- New credit: This metric evaluated the recently availed credit through the most recent credit applications. It has a weightage of about 10% in determining the overall FICO score. It is important to ensure that there are no pending payments remaining and the new credit availed is through proper disclosures.
- Credit mix: Examines the variety of credit accounts i.e., various places from where an individual has taken personal loans, home loans or credit earlier. This helps in proper risk profiling by following up with the other financial institutions about any defaults or errors on the part of the borrower earlier.
Hence, to conclude it is important to acknowledge that CRIF High Mark credit scores remain the primary and most widely used credit assessment tool in India.
Still, FICO scores are also consistently gaining relevance, especially with the introduction of alternative data scoring methods and the improvements in risk profiling due the advancement in technology.
Understanding FICO scores therefore can empower individuals to access credit and navigate the evolving credit assessment world more efficiently.
