Who Will Score The Scorer? - Part 2

Last week, we discussed three possible issues that are beyond the control of the individual and yet affect their score. Fortunately, two of those issues, have been addressed by RBI, in its circular dated June 27, 2014. (Common data base for all bureaus and common scoring range by all bureaus)

As a species, we need to always quantify what we are saying – a number puts a statement into a more specific and measurable focus. Fat, rich, old, tall and so on – all are subjective and relative statements – put a number and the ‘coin drops.’ His weight is 90 kilos, he has $2 billion, she is 93 years old and his height is 6’4”!! Now, we have a peg on which to hang a qualitative statement.

Similarly, a score is a ‘nice’ number to indicate repayment probability, default likelihood etc 500 is better than 400 and 850 is a great score as compared to 750, which is an acceptable score, as against 450 which is an unacceptable low score. The theory of relativity comes into play!

The credit score is increasingly becoming a key number for all of us. It influences credit decisions, determines terms and conditions on future loans and generally affects our credit life.

When the number has such an influencing role, it becomes the responsibility of the stakeholders (RBI, credit bureaus and lenders) to ensure accuracy, consistency and transparency so that there is no consequent adverse impact.

The lenders need to ensure there is complete and accurate reporting to the bureaus, updates are as current as possible, errors identified are promptly rectified, disputes settled and they are generally dynamic and flexible in responding to clients.

The credit bureaus must ensure that data is uploaded promptly, that banks are encouraged to supply data accurately and at shorter intervals, disputes are coordinated and settled and the duping logic used is continuously fine tuned so that all accounts pertaining to a specific individual appear on his report – his details, all his details and only his details!!

The RBI needs to ensure that both the lender and the bureau maintain data standards, settle disputes speedily, and ensure accuracy and the lenders and bureaus do all that is required to not “wrong the individual.”

All this because the data reported is what is used to develop the score and the score is what affects our lives – credit lives!!


Above all, this is needed for complete transparency in the rules, methods and algorithms being used to calculate the score.

I have seen scores of 750+ when the individual has delinquencies, settled accounts and write offs, and I have seen a score of 560 with maybe a couple of days past due and not too many open accounts! I have seen scores vary significantly or sometimes marginally for a changed payment details for two individuals, though the change is the same – a payment made or a payment skipped! This has happened several times with my clients!

Also, wrong accounts (accounts not belonging to the person) are appearing in his credit report resulting in them impacting the score - often in a negative manner.

Having worked in the credit bureau industry and followed it passionately, I do understand that the algorithms are intricate, difficult to explain and have multiple variables, which are complex.

I also understand that any attempt to explain how ‘scores’ work, invariably results in the discussion getting technical, resulting in most people giving up!!

In India, I have seen several articles or blogs on explaining how the score is calculated – I truly wish it were as simple as these articles make it out to be!!

I also know that a typical response to this article will be “…but it is really a complex algorithm and the common man will not understand and it is difficult to simplify such a subject… etc. etc. etc.”

Maybe it is true … maybe not, what is important is inconsistencies and obvious contradictions in credit history and the resultant score, do occur for a host of reasons and directly impact the individual.

Further complicating this process is the fact that each bureau has its own set of algorithms and logic thus possibly resulting in different scores coming up for the same set of data.

So how do we ensure that scores are closer to reflecting true credit risk as against the way it is happening currently. Who will Score the Score?

There are several options and the answer will emerge over the next few years as the usage of scores becomes more widespread.

Options include, not necessarily in any order of priority:
· Bureaus are asked to be more transparent in their method of calculating scores.
· They are asked to rectify some of the anomalies that result in contrarian scores for similar data.
· Banks are encouraged to consider ‘outlier’ scores with more analytical inputs rather than accepting and taking decisions automatically.
· RBI queries the bureaus for any exceptional or seemingly contradictory scores.
· Bureaus are asked to address customer “queries” in a reader friendly manner and if that results in a change of the score, the lenders who accessed the score in the last six months will be re intimated regarding the change.

I am sure this is all early days and emerging and evolving scenarios – the moot question remains – WHO WILL SCORE THE SCORER? The jury is still out on the question!

Multiple options will have to be considered until the strongest method emerges to validate the efficiency of a score.

The need to educate the customer is key – not more articles but meaningful articles, which give the reader a better chance to understand how his score was calculated.

The rating agencies globally were subjected to severe criticism when the global crisis a few years ago through up issues on the rating process and methodology – the day is not too far when credit bureaus will also come up for such criticism.

Time will tell – no Nostradamus around to predict this one!!

About the author: Satish Mehta is the founder and director of www.credexpert.in - a credit & debt counselling company that provides end to end customized counselling to individuals by handholding them through their credit life cycle.