Why the credit score is broken and how to fix it?

A credit score is important for both the borrower and the lender as this score is a measure of the trustworthiness and the creditworthiness of the borrower.

It is a statistical figure which is derived from the credit history of the borrower. It helps in understanding the probability of the borrower to repay the loans taken by him from the financial institutions like banks, venture capitalists or angel investors etc.

So, if you are the one who evaluates the creditworthiness of the customers applying for a loan, you will check their credit score but are you sure that the credit score is accurate and not broken by any chance? Yes, the free credit score can be broken due to various reasons which will be discussed in the later part of this article.

Free Credit Scores

There are various websites and companies on the internet which helps people calculate their credit score by evaluating their credit and financial histories and reports. Since the service is free of charges; many people try these sites to get credit reports and scores. But in most of the scenarios, the scores are either inaccurate or portrays a false picture.

Causes of Discrepancy in the Credit Score

There are multiple reasons behinds the broken credit scores which are discussed below -

  • Most of the data or information which is used in generating the score for the customer is taken from the loan data from the banks etc. and in most of the cases, these data and information are insufficient, false or incomplete.

  • According to the experts in the banking and loan industry, there are various procedures to generate a credit score, the models of evaluation are different and thus the credit scores also vary from one site to another. So there are various free credit score generating websites and they use different approaches which give rise to the discrepancies in the credit scores.

  • On the other hand, most of the banking and financial institutes use the CIBIL scores and model for evaluating the creditworthiness of the customers/ borrowers. But these free resources may or may not use the same model like CIBIL and thus the scores vary in the range of hundred and more on the two platforms.

    For example, when a person gets 780 scores as free credit score from any credit card or credit score sites and applies for a loan, the score in most of the cases drops below 700 or more when evaluated by the banking institute using CIBIL models.

  • Another important cause of this inaccuracy is the inefficiency in inputting the correct data for evaluation. It is like “Garbage in. Garbage Out” as most of the free-scoring sites uses loan data which are fed into the system by data entry operators. Since, they feed innumerable data on a daily basis, in most of the cases the data so fed are incomplete or fake and even wrongly interpreted or copied from the main source. So, the wrong input will eventually provide wrong results. In a lot of cases, the Banks forward this task to Direct Selling Agents or DSAs who go to customer locations to collect data on behalf of the Bank. Most of the times, the DSAs just take bare minimum information and fill the rest themselves leading to greater inaccuracy in the score.

  • Moreover, the free credit resources and even the financial system in most of the places don’t consider the geographical location or the economy as a whole for evaluating the credit score. It is has been observed that the cities with high-income opportunities, job opening and higher pay scale tend to have the higher credit scores. This is because, if a person is having a highly paid job, his creditworthiness certainly develops and vice versa.

  • Age plays another great role which is ignored by most of the credit score reporting sites. With growing age, the money management skills also develop, so if a young person is applying for credit and his scores are lower, it may be because of his money management skills.

How to get an Accurate Credit Score?

As discussed above, the right and accurate credit score is really important as it affects your financial credibility. So, here are few tips for getting it right –

  • Try to use the CIBIL website for getting your credit scores. The version of CIBIL used to calculate the score also matters thus confirm which version to use.

  • There are different simulators used by the sites to increase the creditworthiness thus the credit score. Choose the simulator properly and use it wisely to increase the scores.

  • You can get different credit scores for different sectors. For instance, you are applying for a loan for buying a car, and another loan for a home mortgage. You can have two different scores for these two different loans as they are from two different sectors. This helps in getting more accurate scores.