• The Credit Score and The Probability Of Default

    When a financial institution seeks your credit report, it is looking not only at your credit history but also at the default risk you represent. This information is available to them in the form of credit score and risk grade that are featured at the bottom of your credit report. The score and grade are computed by the CBS based on your debt history. While the credit score is a 4-digit number from 1000 to 2000 representing your credit-worthiness, the risk grade is a 2-alphabet symbol of your default probability. This means that bankers can read the credit score and the risk grade in conjunction to determine whether you would be a reliable customer or not.

    Relationship between Risk Grade And Credit Score:

    The credit scores and risk grades are written together, and each range of score relates to a risk level, thereby creating a singular credit-trust symbol. The relationship between credit scores and risk grades can be explained the best in the terms given below:

    Risk grade Related credit score
    AA 1911 to 2000
    BB 1844 to 1910
    CC 1825 to 1843
    DD 1813 to 1824
    EE 1782 to 1812
    FF 1755 to 1781
    GG 1724 to 1754
    HH 1000 to 1723

    So you cannot have a risk grade of AA and a credit score of 1820, or a credit score of 1986 and a risk grade of EE. Usually, the risk grades AA to DD (corresponding to scores 1813 to 2000) are considered good-to-decent, while those from EE to HH are considered unsafe for lending. Just like credit scores, risk grades also change as you improve your credit behavior. The risk grade moves up as your credit score rises.

    Probability Of Default In Relation To Credit Scores:

    The credit score-risk level combination shows how likely a customer is to repay a debt. The risk description of each risk grade and credit score indicates the probability of default by the customer. The probability of default linked to risk grade are as follows:

    Risk grade Credit score Probability of default
    AA 1911 to 2000 Less than 0.27%
    BB 1844 to 1910 0.27% to 0.67%
    CC 1825 to 1843 0.67% to 0.88%
    DD 1813 to 1824 0.88% to 1.03%
    EE 1782 to 1812 1.03% to 1.58%
    FF 1755 to 1781 1.58% to 2.28%
    GG 1724 to 1754 2.28% to 3.48%
    HH 1000 to 1723 More than 3.48%

    Risk Grades Not Associated With CBS Score:

    Meanwhile, there are risk grades that come without any accompanying credit scores. This happens under the following circumstances:

    • You have nil or insufficient credit history.
    • You either have no previous debts or your accounts fall under the ‘Other’ category, which includes inactive trade, bridging loan and margin trading account.
    • You have a public bankruptcy record.
    • You have more than $300 outstanding balance.

    In such a case you will not receive a credit score, but you will be accorded a risk grade. The score will be displayed as ‘Not Applicable’. These are called non-scored risk grades, and their definitions are as given below:

    Risk grade Description
    HX Public Record, with the possibility of a past or existing writ of summons or a bankruptcy record filed against the customer.
    HZ Existing repayment dues over 90 days or a write-off with outstanding balance of $300 or more.
    D: Dues have been delayed for more than 90 days.
    F: Account is closed with outstanding balance.
    H: Involuntary closure with outstanding balance which may be coupled with surrender of security.
    R: Account is closed and the loan restructured.
    S: Account is closed and settlement negotiated before charging off.
    W: Account is closed as default record by a CBS member.
    GX There is only inquiry record against the customer without public record or a credit file.
    BX Either all the accounts are closed or the customer only has presence in inactive trade, bridging loan, or margin trading account.
    CX Insufficient credit activity, indicating that the data on the customer is too little to be able to arrive at a score.

    You may have noticed that many banks reject a loan application even if the risk grade is CC or BB. This is not because CC or BB are bad scores, but because a loan approval depends on the lender’s risk appetite. Many banks are okay with scores-risk grades of up to 1813-DD, while some banks may want scores-risk grades above 1844-BB. There might even be banks that won’t take anything below 1911-AA. The Credit Bureau is not directly responsible for approval or rejection of a loan; it merely provides lenders with a numerical and objective tool to assist them in the decision-making process.

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