Few aspects of personal finance play as important a role in our financial health as credit. Virtually everyone of us uses it. Many people use it every day. While good credit can make our lives more convenient and organised, bad credit history will make lenders put you in the category of “most risky” as it will be difficult for them to trust you with any loan advance. Don’t be surprised if in future, the company you would have applied for job asks you for your credit score.
Experts believe that your credit history is a reflection of your behavioral pattern and hence it is important to understand everything about it.
Whether you have repaid your EMIs/credit card payments on time or you paid it after the due date or you didn’t pay at all is part of your credit history. All these records go into making your Credit Information Report.
A lender will check your credit history through accessing your Credit Information Report or CIR. While on one hand it helps a lender differentiate between those who have honoured their obligations responsibly and those who have defaulted, on the other it helps the borrower to negotiate better with the lender if his credit history is good. Managing Director, Credit Information Bureau of India (CIBIL), Arun Thukral says, “Individuals who have appropriately manage their obligations build ‘reputational collateral’ with lenders. In turn, this reputational collateral allows individuals to negotiate better terms with a lender”.
Credit Information Report (CIR)
The use of CIRs is best illustrated with an example. You have a home loan with Bank A and a credit card with Bank B. Both Bank A and B have submitted your personal information and payment details to the credit bureau. Recently, you applied for an auto loan to Bank C. Upon receiving your application, Bank C will request Credit Bureau for your CIR so that it could assess how you have been paying your current dues and whether you will be able to manage the additional burden of another EMI. While the bank will request for your Form 16, savings account statements and other identification documents, the CIR has become an important tool in evaluating loan applications. Your asset details including your savings account, fixed deposits, mutual funds and stock investments do not get reported on your CIR.
There is no defaulters list which a credit bureau maintains. It only collects and reports credit information. According to CIBIL “A CIR is a month on month record of an individual’s loan related EMI or credit card payments. Loans can include home loans, credit cards, personal loans, automobile loans and overdraft facilities.” Other information included in a CIR are: Name, date of birth, address and identification numbers like PAN number, passport number, voters number and Telephone number
Account information such as the type of loan taken (home, auto, personal, overdraft, etc), the size of the loan, the current balance outstanding, overdue amount (if any), number of days a payment is overdue (if there is an overdue amount) and so on.
Information on the number of ‘Enquiries’ made by the banks on the individual. An “Enquiry” is created on your CIR every time the lender requests the credit bureau for your CIR.
Whether or not your loan application will be accepted depends on your credit information report. It is important to know how to read your report. If you do not make payments on loans for more than 180 days, the lender is required to “write off” the amount in question. The lender then proceeds to report this on your CIR as “written off”. However, if you make a payment which is less than the amount the lender believes is owed, the lender will report this as “settled” to the credit bureau. Whenever you apply for any credit card or a loan in future, both “written off” and “settled” will be viewed negatively by the lender.
This appears in the Account(s) section of your CIR. There are 2 pieces of information: the Days Past Due (DPD), and the month and year of payment that reside here. The DPD indicates how many days the payment is late that month. Anything other than “000” is considered negative by a lender. Up to 36 months of this payment history (with the most recent month displayed first) are provided in this section.
Also appearing in the Account(s) section of your CIR, the current balances on various loans indicate the depth of your debt. The sum of your current balances helps a lender determine your strength to take on additional EMIs, in relation to your current income. Naturally, lower the current balance, the better the chance of your loan getting approved.
New Credit Facilities
If a lender observes that you have recently been sanctioned a number of new credit facilities, it would mean that your monthly outflow in terms of EMIs, are likely to have increased. Hence, it may have a negative impact on your loan application.
If you have applied for a number of loans in the recent past, the chances of your loan getting approved are likely to suffer. Simply because this credit behaviour indicates that you are “credit hungry” and implies that you are in an urgent need for money. It is likely to make lenders more cautious while evaluating your application.
Review CIR beforehand
Experts advise that before you start looking out for a loan, it is advisable to purchase and review your CIR. It helps you understand what the lender will review while evaluating your application. In case there is any discrepancy that you find on your CIR, you can rectify it timely so that whenever you apply for the loan the process is smooth. You can access your credit report from any credit bureau for a nominal fee by providing identity proof (PAN card, passport, voter’s ID), address proof (bank statement, electricity bill, telephone bill) and making payment (demand-draft, on-line payment). The application can be mailed, or couriered to the addresses mentioned on the websites of the credit bureaus.
In case you find a discrepancy, you can report it to the credit bureau as a ‘Dispute Request’. The disputes can be resolved by simply calling the bureau, or emailing on the address specified on the bureau’s website. Your dispute request is then sent to the relevant lender for confirmation and if that lender agrees, the said discrepancy is removed from your CIR.
Building good credit score
Based on your credit history your credit score is calculated which ranges between 300 to 900 with 300 being worst score. Lenders, depending on their internal policy have a comfort zone of credit score within which they extend loan. “Even if you have made some mistakes resulting in a bad credit score, you can still rebuild it by keep making all your loan repayments on time over next 2-3 years”, suggests MD & CEO, Equifax (India).
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
Courtesy: Financial Express