Need a new phone connection? Make sure you have a good CIBIL score!

Lenders such as banks and other financial institutions are not the only ones with access to CIBIL report, and are gaining acceptance as a means to perform a check on a consumer prior to extending services and offerings. These range from employers to insurance companies and telecom operators. CIBIL reports are sometimes used even for background verification purposes.

What a credit report speaks about you

Simply put, a credit report is a snapshot of your credit history – past repayment records, the type of loans (secured and/ or unsecured) you have availed of, the tenure of the accounts as well as the current outstanding on each of these accounts.

With this information, a lender or service provider can estimate the amount of credit they would want to extend to you, and at what terms and conditions.

A credit score is an integral part of the credit report. Typically ranging between 300 and 900, it is a numeric indictor of your credit history. Naturally, higher the score better are your chances for obtaining a fresh line of credit.

How telecom operators view the credit score

As per the Credit Information Companies Regulation Act (CICRA) 2005, telecom companies can make use of consumer credit reports prior to issuing a post-paid phone connection.  Conversely, as on date, telecom service providers in India do not submit or contribute any data to credit information companies or bureaus.  Also, this practice is currently restricted only to post-paid connections.

When they receive the report, like lending institutions, telecom companies also check whether the score is ‘good’ or ‘bad’. This helps them determine whether they would want to offer the connection or not, in the first place. With every new connection, as with loans, a physical or field verification of the consumer’s identity and address is undertaken. It is possible that with a healthy score, this requirement may be waived and hence the turn around time in providing the connection would be reduced, thereby making it convenient for the customer.

Once that has been established and the connection request granted, the same report and score are used to assign the credit limit that an operator is willing to set for the consumer. Of course, a higher score will translate into a higher credit limit. This is because a good score signifies that the customer is reliable and has a good repayment record when it comes to honouring credit. For example, say your credit limit is set to Rs. 5,000 by the operator and halfway through your billing cycle the amount outstanding is Rs. 7,500. At this stage, without making an interim payment, there may be temporary restrictions on the services available to you. Once the amount is below the credit limit upon payment, the balance can be paid in the next billing cycle.

Further, a telecom company also decides on the security deposit a person may need to pay for a new connection. A good credit history could mean that the amount required by way of the deposit would be lower than for someone with a poor or bad score.

What you should do

With the entrance of telecom companies and other financial service providers such as insurance companies increasingly making use of credit scores, it may not be long before most financial transactions require an individual to have a good credit score.

In some countries the world over, telecom operators do not offer post-paid connections to those users with no prior credit history. This practice may hit Indian shores going forward, therefore establishing a sound credit history gains importance.

Hence it becomes critical to not only know your score, but take measures to improve your credit score if it is not satisfactory. A consistent payment record that ensures no late payment or defaults will help in improving the score.  At regular intervals, therefore, it would be a good practice to check your credit score and make it work for you.

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Can anyone check my CIBIL report without my permission?

A credit report is an all-important font of information that all banks and financial institutions rely on today. As part of the loan approval process, a lender first checks the credit report and then determines whether a loan is to be sanctioned or declined. The better your report reads, better are the chances of your loan application going through.

What is a CIBIL report?

CIBIL is India’s oldest credit bureau, of the four operating today, the others being Equifax, Experian and CRIF High Mark. Hence very often, a credit report is referred to colloquially as a CIBIL report.

However, credit reports are provided by all the above mentioned bureaus.

What kind of enquiry is made against a credit report?

There are two types of ‘hits’ or enquiries that are made against your credit report:

  • Soft enquiry, wherein a lender (or credit card company) requests for a copy of your credit report in order to offer you an enhanced credit limit. Typically, the bank or financial institution does not request for your consent when making this enquiry.
  • Hard enquiry, which is done by a lender when you apply for a loan or credit card. Again, most lenders do not require your consent to pull this report, but some may do so. In which case, it would be mentioned as part of the loan application terms and conditions.

If you realise that there are hard enquiries made against your credit report, it would be wise to bring them to the attention of the concerned credit bureau. There is a possibility that these are a result of your credit report being misused, for example in case of an identity theft wherein another person is attempting to use your personal information to get a loan or credit card. Remember, each hard hit pulls down your credit score, so this should not be taken lightly.

Where are these enquiries used?

Globally, credit reports are used in businesses other than financial services for loans and credit card, such as insurance companies and telecom operators.

In India however, the usage of credit reports is mainly restricted to the financial services sector, as an entry-level check when you apply for a fresh line of credit.

Who can access a credit report?

In the United States, for example, the Fair Credit Reporting Act (FCRA) determines who can get access to an individual’s credit report. Some of the reasons a report can be made available include:

  • A bank or financial institution, to process your loan or credit card application
  • The individual agrees (in writing) to share their credit report
  • On the behest of a court order or subpoena
  • For prospective employment, by an employer (with the candidate’s prior permission)
  • With regards to a business transaction initiated by the individual
  • When utility companies process your application to apply for services, such as telecom
  • When a landlord is appraising your request to rent their property
  • When an insurance company is underwriting your policy

If an individual reports unauthorised use of their credit report, the FCRA will take up the enquiry. For example, an insurance company can view your credit report at the time of underwriting, but not if you subsequently file a claim. It caps actual damages at US$ 1,000 if there is an error owing to oversight, but consumers can also sue for punitive damages, lawyer’s fees and associated court costs.

In India, as per the Credit Information Companies (Regulation) Act, 2005 (CIC Act), the borrower’s consent is not required to (a) collect data from lenders and (b) furnish this information to specified users of credit information by credit information companies. This ‘consent clause’ has been made redundant as per a Reserve Bank of India (RBI) notification dated July 01, 2013. Hence, it is likely that you would know when an enquiry has been made only when you request for a copy of the credit report yourself.

It is important to note that not just about ‘anyone’ can get access to your credit report without your permission. A prospective employer for instance cannot obtain a copy of your report unless you agree to share it with them. Simply put, as on date, no individual or corporate body/ organisation can check your CIBIL report without your permission, unless you have applied for a line of credit as mentioned above.

How can you safeguard yourself?

It is always prudent to keep track of your credit report at regular intervals by obtaining a copy from any or all of the credit bureaus. While the score itself may differ slightly across bureaus, you would be able to tell if any unusual activity is reported. In such an event, contact the concerned bureau(s) immediately to have the data rectified.

Your credit health is the key to your financial future, and the credit report is an extremely crucial factor in the process. Hence, it is never too late to begin monitoring your credit report and safeguarding your financial future.

Personal credit versus institutional credit

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Credit refers to an agreement wherein a borrower receives something of value (for example goods or a service) with the understanding that the lender will be repaid in the future. When a lender extends the facility, the borrower typically repays the loan with interest.

What is personal credit?

Simply put, personal credit is the type of credit facility extended to an individual. This includes both loans and credit cards. Approval of a personal credit facility to a large extent depends upon the data captured in your CIBIL report and the CIBIL score which is an outcome of complex algorithms based on the data.

Loans provide the option whereby you can borrow money towards purchase of say a house, or a car. There are various types of loans available to an individual, ranging from secured to unsecured loans. Let us take a look at some of these types.

Secured loans: This type of loan requires collateral to be provided against which the loan will be provided by the lender. Mortgages (or home loans), auto loans are the most availed of loans in this category. A security is created against the collateral offered, which is then hypotheticated to the lender until such time that the loan is repaid in full. Typically, the loan is paid off in monthly installments over a period of time.

Unsecured loans: A credit card would be a prime example of unsecured lending. Here, a lender extends credit to an individual without requesting for collateral. The amount due (that is the amount spent) on the credit card has to be repaid at the end of each billing cycle. If you choose to roll over your payment, the card issuer levies an interest charge on the outstanding amount, and hence it is prudent to make card payments in a timely manner. Therefore, it is very important to compare credit card before applying.

Credit cards are of various types ranging from charge cards and globally, store cards.

Another popular type of unsecured loan is a personal loan. Here, the lender extends credit for personal use, ranging from home renovation to going on your dream vacation.

Overdrafts constitute another type of loan, wherein basis a facility provided by your bank, you can withdraw money even once your account balance has gone down to zero. In this option, a limit is set depending on your account history and requirement.

Overdrafts come with an interest rate that can be fairly high and are best used for a short-term purpose.

Loans can also be obtained against valuables such as gold, or assets such as securities (or stocks). These loans are also to be repaid within a specific period of time and come with a rate of interest.

What is institutional credit?

In addition to loans for individuals, lenders also provide loans and overdraft facilities to companies, typically for business expansion. For example, a transport company may avail of a loan in order to increase their fleet of vehicles so that they can cater to a larger geographical reach.

The access to capital becomes critical for an organisation to function, across all aspects of the business.

Long-term loans are among the most popular type of loans made available by lenders to institutions. These serve varied purposes – from expansion of business, acquisition and fulfilling working capital requirements.

These loans are normally at a lower interest rate compared to short term loans and need to be repaid on a monthly basis. Lenders prefer to extend this type of credit to seasoned businesses.

Short-term loans, like the name suggests, need to be repaid in full at the end of the loan tenure. These are used to raise money for short term needs such as purchases to increase inventory.

Credit lines are made available to businesses when they require funds on a need-only basis. For example, working capital finance that a cargo company avails of, to buy a number of trucks.

Given the nature of the product however, these can come at fairly high interest rates and most institutions tend to use them to bridge short-term funding requirements.

The bottom line

Irrespective whether you are an individual looking at credit or an institution, you need to be credit healthy for a lender to extend you the facility. Therefore, it is imperative to maintain a clean or good repayment track record on any existing debt, and make timely payments.

If your credit health needs a boost, consider availing of the services of a credit health management company to understand where you stand, and how you can get stronger.

New updates on credit report and score from the RBI

The concept of credit reports and credit scores has been fast gaining acceptance in today’s financial scenario in India, with all lenders using the model to determine whether to extend credit to a customer, or reject an application for a loan or credit card.

While globally the usage of credit reports has gone beyond financial services and extends to employment and even property rental, in India we continue to use reports primarily when it comes to lending. To this end, the Reserve Bank of India (RBI) has been working on the guidelines that need to be followed with respect to credit bureau products and has been revising them periodically.

India’s first credit information company, or credit bureau is CIBIL, and is the oldest having commenced operations in the year 2000. Subsequently, the other bureaus licensed to operate in the country are Equifax, Experian and CRIF High Mark.

In the nascent stages of credit bureau inception, the Credit Information Companies (Regulation) Act, 2005 (CICRA) was operationalised with effect from December 14, 2006. As per Section 15(1) of the Act, every credit institution had to be a member of at least one credit bureau within a period of three months from commencement of the Act. This applied to cooperative banks as well, as they fall under the definition of credit institutions as defined by the Act. This included data sharing by institutions to the bureaus, as a bureau relies on its members to provide information.

Subsequently, in January 2015, the RBI modified this circular, and as per the revised circular as per Section 15 of the CICRA, every credit institution (Non-banking Financial Companies (NBFCs) and banks included) would need to become a member of all the bureaus and moderate the membership and annual fees suitably. With bureaus dependent on their member institutions for data, there is likelihood that credit history of an individual related to non-member credit institutions would not be reported. This would result in incorrect/ incomplete information across bureaus, and the effective solution to streamline the process would be to mandate membership for all institutions. One-time membership fees to be charged by the bureaus to credit institutions cannot exceed Rs. 10,000 each, while the annual fees cannot exceed Rs. 5,000 each.

With membership comes the question of submitting data to credit bureaus on the part of member institutions. A Committee to recommend data formats for furnishing credit information to credit information companies was constituted by the RBI under the aegis of Aditya Puri, MD, HDFC Bank. On examination of the recommendations of the Committee, it had been derived that increased recognition of credit reports is required, especially by Regional Rural Banks (RRBs), State Cooperative Banks (StCBs) and District Central Cooperative Banks (CCBs), to ensure better screening of loan applicants and usage of credit information reports in credit appraisal. Hence, bureaus would now need to hold regular workshops for these institutions.

Further, the Committee also recommended that RRBs should, as part of their credit appraisal process, have suitable provisions for obtaining credit reports from one or more bureaus so that the credit decision is based purely on information available in the system.

On a related note, the databases currently available with bureaus are not adequately populated with data pertaining to commercial borrowers, and hence member institutions are required to report this data to the bureaus in a timely manner, for bureaus to upload this data within a six-month time frame.

To streamline the process still further, standardisation of data formats had been proposed by the Committee for consumer and commercial borrowers. This would be submitted in a non-proprietary reporting format known as the ‘uniform credit reporting format’. A Technical Working Group would be sent up to regularly review the same and suggest modifications as required. However, those NBFCs registered with the RBI as core investment companies, primary dealers and those solely into investment activities without any customer interface are exempt from this inclusion.

The RBI had also requested for changes in reporting data to bureaus for defaulters (Rs. 1.0 crore and above) as well as wilful defaulters (Rs. 25.0 lakhs and above), wherein additional information regarding the PAN number has to be included.

In conclusion

The RBI has been reviewing and monitoring the usage of bureaus as well as the practices adopted by them and member institutions both. With better governance and uniformity of processes, the road ahead for credit information companies looks positive.

Credit Utilization and its effect on CIBIL Score

Rate of credit utilization is the amount of every outstanding balance on your credit card denoted as a percentage of the total of your credit limits of all your credit cards. Your CIBIL score is better if your credit utilization is lower as it displays that you are utilizing only a miniscule part of your limits. It is recommended that an individual’s credit utilization rate should not exceed beyond 30%. Credit utilization represents how people utilize their credit cards and how governed an individual is while using his/her credit.

How rate of credit utilization has an effect on your CIBIL score: The credit utilization rate is a guide for creditors indicating the risks of lending. It is a signal for the creditors that the individual seeking the loan may be facing financial constraints and might be a credit risk. Individuals who tend to cross their credit limits constantly, spending all the money have the tendency of being considerable risks when it is time for repayment in comparison  to people who tend to use their credit cards  responsibly and within their credit limits.

It is a little difficult to compute in exact terms how the rate of credit utilization will affect your credit score, given the availability of different score models. However, there is a staunch correlation between the rate of credit utilization and the credit score. With the exception of people whose rate of credit utilization is at 0%, the people whose credit utilization rate have lower averages have better credit score in comparison to the people who utilize the entire limit on their credit cards. People with multiple cards and a good, long credit history are not as affected by the high rates of utilization as the people using only one card with lesser credit history.

Ways to reduce your utilization rate:

 

  • It is not enough to repay your credit card dues once at the end of the month. Issuers of the credit card can share your account details with credit rating bureaus at any time which may not necessarily be at the end of the month post you paying off the balance. There is a possibility that your balance was high at the time of sharing the data. Therefore, it is advisable to repay your credit dues more than once every month in order to maintain a low balance.
  • If you have more than once card, it is recommended to try to utilize different cards for different transactions rather than using just one card for all the transactions. This would leave you with multiple cards with low utilization rather than one card with high utilization.
  • You can try to maximize the availability of your credit limit. It will not hurt to apply for a limit increase if you have a good credit history or an increase in income. This will assist in having a low utilization rate since your limit has increased while still spending more.

 

Thus, rate of credit utilization plays an important role in your credit score.

Don’t undermine your old credit card for a good CIBIL score

Building a good CIBIL score requires diligence and patience and is not something that can be achieved overnight. Even if you are promised quick-fix methods to build your score, beware – they are the ones most likely to backfire. Over time however, you can work towards improving your credit score, by focusing on your credit history.

Credit cards are one such product that if used judiciously, can help you not only build but also enhance credit score over a period of time.

What is a CIBIL score?

It is a credit score generated by CIBIL, India’s oldest credit bureau. Owing to the first mover advantage, credit scores are very often referred to as CIBIL scores colloquially.

The first step

Your immediate plan of action should include requesting for a copy of your credit report, so that you know where you stand, and where you want to be. Check the report for errors and if you do spot any, have them rectified by contacting the concerned credit bureau. Keep a keen eye out for any payment-related inaccuracies such as delayed or skipped payments.

How will your old credit card help?

If you have been using a credit card for a fairly long period of time, don’t discontinue the card. Making timely payments on cards can generally help improve your score, as it shows a lender that you are able to use credit responsibly. Of course, this only works when you have no delayed or skipped payments, so be very careful as to how you utilise your credit cards. Someone with no credit card usage on their records at all is more likely to be perceived as a higher risk as compared to someone with responsible usage patterns.

Further, you need to use the card to continuously increase credit score, but make sure you don’t max the credit limit on your card. A good rule of thumb is to stay well within the amount assigned to you, the ideal being up to 30% of usage. Consider this: use as much as you can comfortably repay when the bill comes in. If you find it tricky to keep tabs, use your credit card as a debit card – remember that the money in your savings account will go towards card bill payment. In the meantime, rack up reward points on your card that you can then redeem at a later date. This will help boost your credit score, and at the same time you would have stayed well within your means. Credit cards are ultimately not free – while they do offer you the convenience and ease of use, never forget that the dues have to be paid, as it is nothing but a loan.

Also, it is likely that an older credit card has over time been assigned increased credit limits. If you abruptly close your card, the credit utilisation ratio on your remaining cards will go up, with the now reduced combined limit across cards. This can drastically affect your score, as it works as a red flag to lenders. If you really do need to close out an account, consider closing a newer one or maybe one with annual fees instead. You could also try to curb your spending, but retain the old card instead.

The length of credit history is an important parameter when it comes to credit reports. Hence, a card with some vintage, or a ‘good’ old card can go a long way in boosting your score. The older your accounts, the more responsible you seem to a lender and you are rewarded accordingly.

The bottom line

Ultimately, the decision of whether to continue with an old card account or not is entirely your decision. But do keep in mind that undermining such card accounts can be more damaging, and it might just be worth your while to keep them live.