Published On: Tue, Nov 19th, 2013

Assessing your creditworthiness through credit score

credit jizOne  day a friend of mine, a software engineer working in a reputed  software company called me  and asked me  if my  bank  is providing   motor vehicle loans.     On saying yes , I could see  a sunshine  blooming on his face.  As anticipated  he   asked me if I can get a loan sanctioned for him.  Knowing that  his salary account was with some other bank, I said it would be better for him to approach the bank where the corporate salary  account is maintained as that would provide convenience and also proof of income.  In reply he said it is that what has been worrying him.   With a six digit salary and quarterly average balance of over a lakh ruppes  in his salary savings account the bank has rejected his loan application  stating that the  credit history is not good.  I asked him what his credit score  and he was not aware what a credit score is.   I asked him if he had defaulted in any loan repayments for which he said no.  On further questioning he said he had some dispute with two credit card issuers  regarding charges etc  and so has not paid the amounts,  for more than 6 months , pending settlement of the dispute.  I  thought no wonder his loan application has been rejected.    First of all he is a defaulter and  then he does not even know what his credit score is.

Demystifying  credit score

A Credit Score  ( CS )  is a three-digit numeric summary of  the credit history of the individual.  The score is derived using the credit history found in the credit information report( CIR) . A CIR is an individual’s credit payment history across loan types and credit institutions over a period of time.  CIR  contains details of loans only and does not contain details of your savings, investments or fixed deposits. I f you are planning to avail a loan from a bank its always better to have a look at your credit score before applying for the loan.  You can purchase your report from the credit rating agency by  payment of the prescribed fees.    The credit score is calculated based on the credit  behavior  of the individual  reflected in the ‘Accounts’ and ‘Enquiries’ section of the  CIR.  CIBIL the largest and most popular individual credit rating agency awards a credit score in  ranges between 300-900. A score above 700 is generally considered good.

An individual’s Credit Score provides a lender with an indication of the ”probability of default” by the individual based on their credit history.  In other words it means that as a  borrower  how likely you are, to pay back a loan  based on your past pattern of credit usage and loan repayment behavior. The closer you are to 900, the more confidence the lender will have in your ability to repay the loan and hence, the better the chances of your application getting approved.

The  report contains  personal information  like   name, date of birth, gender and identification numbers such as PAN, passport number, voter’s number, contact information like  address , phone numbers ,,    employment information,  monthly or annual income details as reported by the credit institution ,   and account information like  the details of your credit facilities including name of lenders, type of credit facilities , account numbers, ownership details, date opened, date of last payment, loan amount, current balance and a month on month record (of up to 3 years) of your payments.  Enquiry Information  which is a history of  enquiries made by financial institutions , every time  an individual applies for a loan is also available in the report.

Improving your credit score

As the report contains so much information , other than your income,  the report becomes the  single most important tool used by a bank to evaluate  your application for any loan. Thus it becomes very important  for individuals to understand the credit score and how to improve your score by maintaining a good credit history.  The  golden rules that  can help you in maintaining a good credit history are  Making payment of all your bills on time,  Keeping the balances  low,  Applying  for new credit in moderation,  Maintaining  a healthy mix of secured and unsecured  credit, Monitor your co-signed and joint accounts monthly and  Reviewing  your credit history  periodically and especially before making a loan application.

The most important points  looked at by a bank  in your credit report  while evaluating your  loan applications are  payment history and current balances.   Payment History – The payment history appears in the accounts  section of your  credit report and has two parts –  the Days Past Due (DPD), and the month and year of payment that reside here. The DPD indicates  the delay in making the monthly  payment  of a particular month.  Anything other than “000” is considered negative by a bank  and anything more than 90 would mean that your account is NPA with the bank.  The chances of you getting a loan from any other bank would be very bleak under such circumstances. .  On occasion you may see “XXX” reported for your DPD on a certain account. This means that the Loan provider has not reported that month’s DPD to CIBIL and hence, there’s no need to worry.  Such payment history will be  available for a period of  36 months.   Current Balances –  Current balances also appears in the accounts section and this indicates  the total loans outstanding in your name  and thus helps the banks to evaluate 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.  In the case of credit card and overdraft accounts the maximum limit will be displayed as high credit and in the case of loans the amount sanctioned will also be displayed.

The ownership indicators on the credit report will mention who is responsible for  payment of that credit facility.  If the ownership indicator has been mentioned single then you are solely responsible for making payments on that  account. Joint ownership indicator means you and someone else bear joint responsibility for payments on these accounts.   Authorized  user indicator usually appears in the case of  add-on credit cards and implies that  you have an access to credit, but are not responsible for paying dues on that particular account.  If you guarantee  to  honour  an  obligation, in case the principal applicant is unable to do so, you will be shown as a guarantor for that account.

As per the Credit Information Companies (Regulation) Act, 2005 governing Credit Information Companies, all accounts irrespective of their status (both Good Standing and Delinquent accounts) have to be maintained for a minimum period of 7 years from the date the account was last reported. Thus even closed accounts will be appearing in your credit report. If you find a date adjacent to the ‘Closed’ field in the account section of your  credit report, this means that that loan account has been closed by the loan provider. In other words, it means you have paid off your loan.  However, if you have not been able to pay off your dues in full, your account could still be marked ‘Closed’. In such cases, you may see the ‘Status’ section populated (Written-off or Settled), which is viewed negatively by  banks and other credit institutions.

If no date is populated in the ‘Closed’ field, it  means  that your account is still open. This can be harmful to your loan application,  because banks would think the loans to be open  and consider repayment obligations for that also. This will affect your repayment capacity and  negatively impact your loan application. Hence, if you see open accounts on your credit report that are actually closed, raise a Dispute Resolution request.

You can raise a dispute resolution request by  logging on to the credit bureau’s website  and providing   name, address, date of birth,  nature of error and control number. The control number  would be a unique number generated every time a credit report is generated. It is very important to provide this number to the bureau, as it helps them to  identify the credit report on which you would like to ‘dispute’ information.

Once you have raised a Dispute Request, the credit rating agency   , after checking   whether all the requisite details have been provided will forward it to the Dispute Resolution Department for Analysis. If the credit bureau is unable to resolve the request, it is routed to the relevant bank . If there is an error the bank will provide the agency  the corrected data.  The rating agency will then  update  the data and informs  you  of the same.  Normally the dispute resolution would  take  around  30 days,  and could vary depending on the time taken by banks to respond.  In case you are not satisfied with the dispute resolution or it is taking more time than expected you can  contact the lenders  directly.

The errors which can occur in your credit report are inaccurate current balance or amount overdue  which could normally happen  if you have purchased your  credit report within 45 days of making a payment as loan providers report information to rating agencies only  on a monthly basis.  There could also be mistakes regarding  incorrect personal details,  ownership  etc .

Importance of credit score to an individual .

The  advent of credit scoring for individuals   would make the life of prompt  borrowers more easier and happier.   Banks while granting loans charge a risk premium , for compensating the default risk incurred by the bank.  Earlier when credit ratings were not available for individuals the banks would treat  all loan seekers equally. Each applicant, if approved by the Credit Institution’s internal credit policy, would get charged the same interest rate for a particular loan size and purpose.  For a prompt borrower this rate would be higher as the  bank would be charging a  higher interest rate to all borrowers, in order to compensate for the possible default of a small portion of the loans disbursed, just like  a college professor  punishing an entire class of students  for the mischief played by a few errant students . Today,  credit reports and the credit score provide  the banks  the ability to differentiate between those who have honoured their loan repayment  obligations responsibly and those who have defaulted. Individuals who have appropriately managed their obligations build ‘reputational collateral’ with  banks and thus gives them more head room  to negotiate better terms.

As the  credit report provides a snapshot of your credit profile, it  also helps you to  understand the total amount borrowed by him, total amount outstanding  and also identify areas for improving his creditworthiness.  But it  should also be remembered that credit score is not the final deciding factor in a credit application and  even if your credit score is high , banks  may choose not to lend to you, probable    because  bank  feels that you are not able to take on the burden of additional EMIs.  But definitely having a good credit score will weigh heavily in your favour for having your loan sanctioned.

Jiz p kottukappolly

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Assessing your creditworthiness through credit score