An old colleague called me recently.
I knew he had lost his job last year and had gone through a divorce, which had also put a lot of pressure on his finances.
Although as a finance professional he understood the value of a good credit standing, circumstances had forced him to start defaulting on his car loan and credit cards after his savings were wiped out to pre-pay the home loan (his ex-wife got the flat) and meet day-to-day expenses.
He had just gotten a new job and wanted to make a fresh start. But his defaults were beginning to affect his life. He was aware that he had to repair his credit standing, but was not aware of how to go about it.
That rang a bell. I have been asked similar questions by a lot of people who either through circumstances (like my friend) or because of a lack of financial discipline, had defaulted on their financial obligations, and were now looking make amends, but did not know how.
First, a crash course on what happens when you default on your financial obligations.
Today, every lender is required to share data about the repayment history of their borrowers with at least one credit information company (generically known as Cibil since the company — Credit Information Bureau (India) Ltd — is the largest and the oldest of the four licensed credit information companies).
It is a misconception that lenders share repayment data only about customers who default on loans. They are required to share data about the repayment of all their borrowers. So anybody who has taken in a loan (which includes me) and is currently servicing it will find “his or her name in Cibil”.
But for most of us, this is extremely useful — if I were in the market for a new loan now, the banks will be happy to lend me at a good rate simply because they will discover that my existing loan repayments have been bang on time and the level of indebtedness is reasonable. The issue, of course, arises if my credit information report shows defaults (current or past).
This credit report has special significance as it determines the credit worthiness of any individual. The need for credit is an important aspect of modern day life. So if you have defaulted on your payments for any reason, your credit information report will immediately disclose this status to any prospective lender. With a bad credit report, it is unlikely that you can get any loan or credit card from any bank.
But all is not lost. You can re-build your credit history.
Now that you have been reported a defaulter, and you are burdened with debt, then what should you do? Help comes in the form of specialised credit counselling agencies who can assist you in such a situation. The well-known ones are the ICICI initiated venture Disha Trust (www.dishafc.org) and Bank of India initiated Abhay Credit Counselling (www. abhaycreditcounselling.com).
These agencies assist you in negotiating with your existing lenders and re-structuring your debt, which can be both curative and preventive. The service is free and they accept all cases, irrespective of which bank issued you the loan.
So all is not lost. If you are considering obtaining a loan in future with low interest rates, you must have a healthy credit score. “Worrying too much about your bad credit history is not going to help, but doing the right things will certainly help,” says Lugani.
To start re-building your credit history, begin by paying off the re-structured debts. But remember, it is a slow process. It is a misperception that if you could somehow find the money and pay off all the debt, it will immediately give you a clean slate.
What the report will show is that you had defaulted in the past but that you cleared everything off at a particular point of time. That, coupled with some other steps, should help you in slowly rebuilding your credit history.
“Customers should not be obsessed about the Cibil credit report. They should first think about the loan, which they have to repay and the need of the hour is how to come out of it; Cibil report is secondary. Once you regularly start paying your debts in time, then with the passage of time, your credit history will improve,” says Nutan Lugani, counsellor of Disha Trust.
Cibil keeps your records for 7 years but displays the month-by-month repayment record only for the last 36 months. What this means is if you start maintaining a clean history after re-structuring or paying off your loans, then your credit history will start looking good after 3 years. Cibil also computes a credit score for each individual, which probably is based on the entire 7 years data. However, currently, only a few banks use the Credit score, so it is your visible data for 3 years that has more relevance.
Meantime, you can also start adopting measures which enable you to rebuild credit history like taking secured credit cards, which are given against the security of your fixed deposits. These cards may not be your dream cards, but they are often the best option you have since you are unlikely to be eligible for their regular credit cards. Your credit limit may even be raised in future if you have shown good financial behaviour.
You can also opt for secured personal loans where an asset is required as collateral. It normally involves bigger sums of money and secured personal loans are preferred by lenders due to the fact that they are secured against your assets such as jewellery, securities such as shares/ mutual fund units, bonds, NSC, KVP, life insurance policies with high surrender value, etc.
All these loans (with the sole exception of loan against property, which is unlikely to be available for somebody who has defaulted in the past) are available irrespective of your credit record.
Lugani offers a word of caution here: Check your expenses and do not increase your credit exposure to immediately repay the present loan to salvage the situation.
Service your loans religiously and the disciplined you will also reflect in your repayment history in Cibil records. In fact, after 3 years, the remnants of your bad history may no longer be visible.
Next week, we’ll look at how to get mistakes in your credit report corrected.
Credit Sudhaar is India’s first Credit Health management & improvement company whose goal is to help clients to Restore, Enhance and Protect their Credit and make them credit healthy