Assessing your creditworthiness through credit score
One 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.
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