How to enhance your loan eligibility

Every bank follows a credit appraisal process in order to determine a borrower’s loan eligibility. It checks the CIBIL score of an individual, and assesses the CIBIL report, income and other documents to determine whether the borrower is capable of repaying the loan on time or not. By working on the credit profile and improving credit score one can increase the chances of approval.

Here are some ways that can help you increase your loan eligibility.

Longer tenure of loan– Repayment capacity of the borrower is a major factor that banks consider before sanctioning a loan. If the monthly instalment is higher than what the bank thinks you can afford to pay, then your eligibility will be affected. Opting for a longer tenure will reduce your EMI liability and enhance your eligibility. Though a longer tenure will increase your net interest outgo it will at least make you eligible for the loan. 

Additional income-Showcasing that you have a high steady income helps to increase your loan eligibility. Keep a record of the variable perks or performance linked pay that you earn from your job and add them to your income. Mention the other sources of income such as high interest fixed deposits or rental income on the property that you own. Such additional sources of income will enhance your repayment capacity and increase the amount that you are eligible for. You may need to furnish supporting documents as proof of the additional income. So keep them handy.

Step-Up Loans- Step-Up loans are a great way to increase the loan eligibility. For people who are in a profession where there is struggle in the initial years, but surety of a good financial status going forward, this is an easy way to borrow funds. Here an individual pays a lower EMI in the initial years. The EMI progressively increases with the tenure of the loan. Here the eligibility increases as the future income is expected to increase as the borrower establishes himself in his profession.

Prepay-existing loans- If you are considering taking a home loan, then prepaying your outstanding loans like a car loan or a personal loan, is a good way to enhance your eligibility. The EMI that you are already paying on the existing loans reduces your monthly repayment capacity and impacts the home loan amount that you may be eligible for. For example if your monthly income is Rs 1 lakh, the bank may consider your repayment capability as Rs 50,000 as EMI. But if you already have a personal loan where the EMI is Rs 20,000 this will be deducted from the amount that you can afford. So to arrive at the eligible amount, the bank will consider your affordability as Rs 30,000. Hence it is advisable to prepay these loans before making a home loan commitment.

Co-borrower-The assessment of the repayment capacity of the borrower largely depends on his income.  The EMI is generally half the take home salary. But if it falls short of the required limit you can bring in a co-applicant. If your spouse is earning, then it is a good idea to make a joint application. Pooling two incomes together enhances the loan eligibility amount to a great extent. This also means that the liability of repaying rests on both the applicants.

 Work on your CIBIL score- CIBIL score is an important factor that determines loan eligibility. Hence you should make all efforts to improve credit score. Check your CIBIL report and score regularly. If you notice an errors then dispute them immediately. Pay your monthly instalments and credit card bills on time. Use your credit card wisely. By keeping the utilization levels below 30% of available credit limit you will ensure that you improve credit score.

When you work on the important aspects (like income and credit score) that the bank evaluates in order to make an assessment, you can surely enhance your loan eligibility.

 

Does credit card limit has any impact on your credit score?

A good CIBIL score ensures that you can have an easy access to financial services in times of need. You can qualify for loans at a low rate of interest as a good CIBIL rating demonstrates that you are financially stable. There are several factors that go into the calculation of a credit score. Though different agencies have different credit scoring algorithms the major influencing factors for all of them include the payment history, credit utilization ratio, length of the credit history, type of accounts and new credit.

Credit utilization ratio has a strong correlation with the credit score. This ratio depends on two factors. Your total outstanding balance and the credit limit. A credit limit is the maximum amount that will be extended to you by the lender. You cannot charge more than that amount within a stipulated period of time. If you do not know your credit limit, you can either sign in to your credit card account to view the limit or call and ask the card company.

The credit utilization ratio is calculated by dividing the total outstanding balance on all revolving accounts with the total credit limit. For example if you have a credit limit of Rs 3,00,000 and your outstanding balance at the end of the month is Rs 2,40,000, your credit utilization ratio is 2,40,000/3,00,000 i.e 0.80. This means that you are using 80% of the available credit. This high ratio is a strong warning sign of credit risk. It indicates that either you are living beyond your means or you are experiencing financial difficulty. Your profile is considered risky as you may have trouble making future payments. Hence a high utilization will bring your credit score down. If your outstanding balance is only Rs 30,000 then the ratio will be 30,000/3,00,00 i.e 0.10. A low utilization ratio is a sign of financial soundness as you are not using too much of available credit. This works in favour of the credit score. Hence the credit card limit directly affects the credit utilization ratio and therefore the credit score of an individual.

Does a low credit limit translate into a low score?

If you have a low credit limit, it does not necessarily mean that you will have a low credit score. If you pay your credit cards in full each month before the due date and do not carry any balances your credit utilization ratio will be zero. In this case the amount of credit limit will not have any effect on the score. It is always a good idea to keep the credit card balance as low as possible in relation to the total credit limit. If you do so you can keep the overall credit picture healthy even if your limit is not too high.

Should you request for a credit limit increase to raise your score?

 

If you are looking to improve credit score, then a higher credit limit will definitely be a good thing. You can either request your current credit card company to raise your limit or apply for a new credit card. Even if the amount owed by you remains the same, a high limit will result in a lower debt utilization. It is suggested to keep the utilization below 30% if you are trying to improve credit score.

 

When a card company extends your credit limit it increases the amount of debt you can incur and gives you greater buying power. Just make sure that a high limit does not tempt you to increase your spending, otherwise the whole purpose of getting the limit increased will be defeated. Take into account your saving goals and exercise financial discipline. Use the limit only when you really need it. If you are not careful you will carry more balances each month and that will translate into paying more interest to the card company.

 

Will closing a credit card account affect my credit score?

It is never a good decision to close old unused credit cards just for the sake of cleaning up your credit profile as far as credit score is concerned. That’s because closing a card will reduce your total credit limit available and increase your credit utilization ratio.

Your credit card limit surely has an effect on the credit score. But it is only one piece of the puzzle. If you are trying to improve credit score it is necessary to look at the bigger picture. Paying down outstanding balances and maintaining a clean track record of on time payments also go a long way in enhancing your score.

 

Hurdles you can face while applying for an education loan

Fulfilling dreams of a higher education is probably one of the biggest achievements for any aspiring student. With the escalating cost of education both in India and overseas, most students have no choice but to avail of a loan if they are to pursue the programme of their choice at the university or college they prefer. Even while a rising number of students are now availing of finance to comfortably fund their education, doubts and ambiguities still run rife with regards to the education loan procedure, the products available, repayment and even to understand what aspect gets funded under an education loan – whether just the tuition or also living expenses and any other related costs.

Let’s take a look at the hurdles that students still continue to face when applying for an education loan with some lenders. One of the first things that are of concern is the limitation on loan amounts with public sector undertaking (PSU) banks. For instance, a master’s degree from reputed university abroad costs upwards of Rs. 50.0 lakhs, and funding it can be a concern when the maximum cap on the loan amount is Rs. 20.0 lakhs.

Another parameter that students need to factor in is the margin money, which is essentially the difference between the required amount and what the bank agrees to sanction. Typically, most banks ask for margin money amounting to 15 percent of the total cost.

Documentation woes also plague students, as the process calls for a laundry list of documents to be submitted. Not only is this tedious but in some cases, it involves running from pillar to post to obtain the required documents. It can also necessitate into multiple visits to the concerned bank in order to submit these documents (often piecemeal) and have the loan application processed only subsequently.

Further, while banks may have an extensive network, not all branches may sell education loans. Hence, it proves to be difficult to avail of a loan if a student is located in a city wherein a branch that processes education loans is not available. On a related note, it is likely that a student is originally from City A, but has relocated to City B to pursue higher studies. If the loan requires collateral which is located in City C, chances are that a PSU bank is likely to decline the loan application, as they require the student as well as the collateral to be in the same city.

How do you overcome these hurdles?

With the advent of non-banking finance companies (NBFCs) in the education loan sector since the past few years, the playing field has opened up and students have a lot more options than they did even a decade ago, when it was primarily PSUs that disbursed education loans. Consequently, the process has become simpler and more streamlined. Not only do students have more options by which they can compare education loans but the competition has meant ramped up customer service levels as well as innovative products. Before you narrow down on a lender to finance your dreams of a higher education, shop around. Evaluate the various lenders in the market and see what it is that they each have to offer by way of products and services. For instance, in addition to the loan, some lenders offer a bundle of value-added services that include calling cards for overseas students, insurance and deals on foreign exchange services.

Check whether the cost of education includes even your travel expenses and accommodation. These days, lenders structure a loan such that these aspects are covered and even expenses such as having to purchase a laptop to use for studies, for example. These are some of the value added services that make availing of an education loan attractive.

When it comes to documentation, the requirements are simplified by some lenders and a one-time exercise is all that it takes in order to submit a loan application. This sometimes gets further simplified if the education institution that you are planning to enrol at has a tie-up with a financer.

When you compare education loans, do keep in mind that the interest rate is one of the factors that you need to evaluate. In addition, facets of the loan such as repayment options, ease of transaction processing and flexibility in terms of online access and repayment of the loan directly from overseas also make a vast difference. Hence even if the rate of interest is marginally higher, you may consider availing of a loan from an NBFC just for the sheer convenience and flexibility they offer.

Education loan and CIBIL rating

As with other loan products, your credit score counts even when applying for an education loan. For a student with no credit against their name, the credit score of the co-borrower is what is taken into account. Hence, to ensure a lender is aware of your creditworthiness you need to maintain a healthy credit score. An education loan is a product that no parent would want to compromise on, given that it is directly related to their child’s future. Hence to be able to get the loan when you really do require one, ensure that your credit score is treated on par with your physical fitness.

 

 

Ways you can improve your CIBIL score fast

My name is Sonali Kulkarni. About three years ago, I settled a loan for 4 lakhs that I took from a NBFC. That settlement still shows on my credit report. It is affecting my credit applications. What can I do to have it removed from my report?

What Sonali has faced, you might be facing too. What she didn’t know is that such “settlements” reflect in the credit report for at least 7 years from the date of last reporting. Yes, as shocking as it may be having unhealthy credit practices or having been reckless with regards to your finances, can affect you miserably for a long time. Our most sincere advice to Sonali was to adopt healthy and responsible credit practices.

Theoretically, a lot people will suggest you to “observe credit discipline” and adopt “healthy credit practices”. We shall answer in this article what it really means to be credit disciplined and how you can be counted as a “responsible credit user”.

There are a number of ways on how to boost your credit score, however, there are some practical habits that you can start implementing from this moment onwards. Below are some very realistic tips that will help you to improve CIBIL score and also by practising these on a regular basis you will be able to maintain authority on your finances.

  1. Avoid cheque bounce: Some things are beyond our control. But things like issuing cheques and allowing them to bounce due to “insufficient funds” is very much within our control. A cheque bounce will not only attract bank charges, further reducing your balance but also adversely impact your score. Issue cheques for amount that you have or else ask to give post dated cheques (PDCs) for dates when you will have funds to honour your payments.

 

It is most advisable that you streamline your finances. Try to manage funds as judiciously as you can, avoid making hasty impetuous decisions regarding your money and most importantly exercise self control over your expenses.

 

  1. Standing Instructions (SI): You may have been late inadvertently in sending payments on your loan instalments or credit card dues. It’s time for taking some corrective action. Do this for future. Find out your billing cycle and your due dates. Set a standing instruction for an auto debit on your salary account or your savings account, where you are sure funds would be available to make the requisite payment. By doing so the lender will automatically debit your account on the set due date and this way you will not be hassled with remembering all the payment cycles. But make sure the account on which you have set the SI should not be out of funds before the due date orelse you will again become a defaulter on loan.

 

You can set SIs for your electricity bills, phone bills, etc too. This habit will keep you free of any anxiety over bill payments.

 

  1. Stop applying for credit from various lenders: You are already in the red zone because you have been unable to service your obligations properly. Yet you go ahead to ask for futher loans? No. This is not a good habit. Firstly, since you are already struggling with a low rank of credit rating, CIBIL member banks and NBFCs will not be willing to sanction any further credit to you. Bankers will be cautious of you as you are bound to exceed your debt servicing capacity and due to overload of credit you may not be able to honour any repayments.

 

Secondly, even if you do have loans from several banks you are bound to mismanage them and forget to make timely payments. A responsible credit user will consolidate his debt to not more than two loans. That means, pay off all other petty debts using money from one loan and then service that single loan on time.

 

Thirdly, it does display that you have an insatiable hunger for credit. Banks and lenders are unwilling to party with such individuals. Credit discipline demands that you do not display such inappropriate behaviour.

 

  1. Prefer Secured Loans over Unsecured Loans: If you must go for some form of credit then prefer to go for secured loans like home loan, loan against your FDs, loan against gold or property or equity holdings. Avoid asking for unsecured loans like personal loans, even if they are easy to get. You may want to apply for a secured credit card vis-à-vis a normal credit card. This is so because, unsecured loans attract a higher rate of interest and that would mean a higher payout of EMI every month. Higher the percentage of unsecured loans, greater will be your responsibility to service it.

 

  1. Avoid using too much of your credit limits: Going overboard with credit will indirectly impact your CIBIL report With an overused credit card, every month there will be increasing outstanding balance to pay off. Unless you habitually pay it off in full, which ideally a responsible credit user will, your outstanding balance will just keep building up. This will mean increased credit burden and might put you in a situation where you may not be able to pay it.

Don’t be desperate for credit. Rein in your urges and be more patient. This will yield positive long term benefits and may you never have to worry about credit woes again.

5 Components of CIBIL Score

 

Very often people are startled to find out that they have a low CIBIL score and they begin to wonder if there are ways to improve credit score. One must understand that building credit is a time consuming activity and requires your persistent efforts. Although there are no quick fix solutions, but there are indeed ways by which one can catch up with the goal of having an ideal score. But before you learn of ways to increase your CIBIL score, you must understand what all fuels your score and on the basis of what are you marked.

Your CIBIL TransUnion Score & CIR

Your score will be between 300 and 900 with 300 being a poor score while 900 being an ideal one. This three digit score tells a lender on how well have you done on your credit front, how diligent were you in your repayments, were your payments on time or were they late often, whether you display a credit hungry behaviour or do you have a portfolio that is skewed more towards unsecured loans. All this and more can be deduced by a lender by going through your score and Credit Information Report (CIR) to judge how likely are you to default on your repayments.

Factors deciding your score

Now, a common question arising in anyone’s mind is what the factors that help determine a credit score are. There are 5 major elements that are considered to impact your credit score. These are:

5 components of cibil score

  1. Timely repayments: The first and the foremost thing to impact your credit score is how well within time have you repaid your loan instalments or credit card dues. Any misses or defaults in payments within the last couple of years will lead to an adverse impact on your score because it would mean that you are facing difficulty in servicing existing debt. This may be due to either insufficient funds or due to you forgetting to pay in time. In either case, there will be a downward impact on the rating. Although there are quite a few ways to enhance your credit score but being on time has the maximum weightage in the calculation of your score. So next time, make sure you don’t miss any payments.
  1. Age of Credit: This is why we mentioned above that building your credit history is a time taking process. Because lenders are interested in your track record as a user of credit, proving to them that you are an old horse might fall in your favour. For example, an old credit card is significant proof that you have been using and maintaining credit for quite some time. It is possible that you are attracted by better deals on latest credit cards. However, keeping a credit card that you have been using since long will have a constructive impact on your credit score. This is because it shows you in a positive light and prospective lenders expect you will continue repaying debt just as you have been doing in the past.
  1. How much credit limit is being used: Like the old saying “Cut your dress according to your cloth” one must but of course be careful in using credit. It might be tempting to use your entire credit limit but a prudent credit user will only use what he or she can repay. For example, you may have a larger sanction limit on your loan but you ask for only 60% to 70% of it. Or, if you spend large amounts on your credit card but are only able to pay minimum dues, then your outstanding bill will keep rolling over and build up to a colossal figure. This might put you in unnecessary pressure and might damage your score as well.
  1. Skewed towards Unsecured loans or Secured loans: A lot depends on the percentage of secured loans and unsecured loans in your debt portfolio. It might seem easier to obtain an unsecured loan like a personal loan, credit card or an education loan for MBA, but they do carry a higher rate of interest. Due to a higher interest burden, the amount of outstanding dues is always higher. On the other hand, a secured loan like a home loan or car loan, where there is an underlying asset, the rate of interest is relatively lower and therefore its payments account for a smaller figure in the portfolio. Secured loans have a positive impact on the credit score.
  1. On the lookout for more and more credit: By doing so, you display an insatiable hunger for living off credit. The debt taken has to be returned to the lender with additional interest money. We all have finite means of earning and limited income. Unless, you can justify your repayment capacity, this behaviour too adversely affects the credit rating of an individual. Seeking more credit means a declining repayment ability and an increased chance of default.

By assessing your credit report, a lender makes up his mind on whether to approve your loan or to adjust their terms based on it or to decline the proposal completely. Believe it or not, but you can break or make your credit health depending on how well you manage your credit score. The more conscious you are of the way you handle your finances the better it will be for a credit friendly future.

Happy Credit to you

Realistic tips to help improve your CIBIL score

There was a time when financial fitness was not up there on the to-do list of most people, but that is definitely not the case anymore. One of the factors that determine from a lending perspective just how healthy you are is your credit score. Globally, the credit score not only helps you get a loan or credit card, but can also be the deciding factor in your securing a job, the premium you will pay on your insurance, getting an apartment on rent or even a new mobile phone connection.

In India, while credit scores are not an alien or unfamiliar concept any longer, the usage as of now is mainly restricted to the banking and financial services (BFSI) domain.

What is a CIBIL score?

We’ve touched upon credit scores – what then is a CIBIL score and how does it differ? Well, a CIBIL score is nothing but a credit score, but with CIBIL being India’s oldest credit information company or bureau, the terms are used interchangeably. A score ranges between 300 and 900 and conveys your creditworthiness to a lender, that is the likely of a customer defaulting on the loan or credit card payment.

However, if you wish to call for a copy of your credit report, you can do so from any or all of the credit bureaus, namely CIBIL, Equifax, Experian and CRIF High Mark.

Factors that impact the CIBIL score

Broadly, given below are the factors that impact the score, and hence it becomes important to monitor the score at regular intervals, to ensure the information contained therein is accurate as well as complete. Any discrepancies need to be rectified immediately, so that they do not have a negative impact on your score.

If you look at the chart above, a large chunk taken into account pertains to your repayment history; hence tracking your payment becomes important.

Tips to improve the CIBIL score

Now that we know what constitutes a CIBIL score and the important and relevance it has in our lives, let’s look at how to boost your credit score.

Check your credit report – Once you are armed with a copy of your credit report, is it the first step towards achieving your goal of good credit health. Check this report and ensure all data mentioned therein is accurate and up to date. In case of any errors, you would need to have them resolved with the concerned lender as well as the credit bureau.

Timely bill payment – Whether credit card dues or a loan EMI, make sure that you do not delay payments, or worse, skip making one. This simple practice can fracture your score if not addressed. Set up payment reminders or sign up for auto debit instructions to ensure that all your outstanding dues are cleared in time, on or before the due date.

Clear off debt – If your credit report is riddled with multiple open lines of credit, consider closing them, one by one. Even if this appears to be a tedious process, in the long run it can do wonders for your score.

Retain ‘good’ old debt – While you may do well to clear off outstanding dues, what can go against this effort is closing old accounts with a good payment history. With your repayment track record amounting to as much as 35 percent of your credit report, it is important to maintain an account that is old, and has been serviced well throughout. This indicates your credit responsible behaviour and can help your score immensely.

Track your credit utilisation ratio – The ideal credit utilisation ratio is 30 percent of your overall limit, be it one card you hold or several. To cite an example, if your credit limit is Rs. 1.0 lakh, make sure your spends do not cross Rs. 30,000 as high utilisation of the limit can indicate credit hungry behaviour.

Keep the limits reasonable – While a high credit limit may sound very attractive, it can also tempt you to spend beyond your means, landing you into a possible debt trap. Hence, while a low limit may not serve the purpose of having a credit card to begin with, it is always a good idea to have a reasonable limit.

Maintain a good credit mix – Having a skewed portfolio may indicate credit hungry behaviour to a lender, especially if you tend to lean towards unsecured products such as personal loans or credit cards. Throw in a healthy mix of secured products as well, and you are likely doing your credit score a favour.

In conclusion

Remember though that there is no quick-fix solution to increase credit score. It is an exercise that takes some amount of time and financial discipline. However, once you put your mind to it, it is only a matter of time before your score gets back on track.

When you’re next applying for a credit card or a loan is when your credit score will come in handy. Hence it is never too late to get on the path to good credit health.

 

CIBIL score repair made easy!

Karan was looking to upgrade from his existing two-wheeler to a car and approached his bank for an auto loan. He was shocked to learn that his loan application was rejected on the grounds that his CIBIL score was low. Neither did Karan know much about his score, and nor was he aware as to why it was so low. Taking this as an opportunity, Karan analysed his spending behaviour pattern and religiously monitored his CIBIL score.

Does Karan’s situation sound unfortunately too close to home? Are you also looking at ways and means to better your own credit score? If yes, you’re in the right place – read on to know more!

In today’s financial environment, your credit score is akin to your passport to good credit when you require it. As in Karan’s case above, he was unable to obtain credit when he most required it, and hence when he eventually did get the loan it was at a higher cost and seeing that the price on the car also went up in the same period, he wound up spending more money than he would have otherwise.

What is a credit score?

A credit score is a three-digit representation of your creditworthiness, i.e. the likelihood of a borrower going to default on a loan. It is derived from your credit report which is a detailed analysis of your credit behaviour, both past and present.

When you approach a bank or other financial institution for a loan, the first check thye conduct prior to taking a decision as to whether to lend is to call for a copy of your credit report and go through your credit score. Typically ranging between 300 and 900 a higher score equals better chances of loan approval at the most competitive interest rates and other terms.

What then is the CIBIL score?

There are four credit information companies or credit bureaus licensed to operate in the country by India’s apex bank, the Reserve Bank of India (RBI), namely CIBIL, Equifax, Experian and CRIF High Mark. Of these CIBIL is the oldest bureau and hence very often, the term ‘CIBIL score’ is used interchangeably with ‘credit score’.

However, bureau reports and scores are both available across all four bureaus and if you wish, you can obtain a copy of your report from any or all of these bureaus. While the score itself may differ from one bureau to another, the analytics on which it is based is similar as all bureaus take into consideration the same factors when calculating the credit score.

What are the factors that impact the credit score?

A credit score is determined on the below mentioned parameters which are determined from your credit history:

  • Repayment track record or payment history
  • The amount you owe lender(s), or the outstanding due on your loans/ credit cards
  • Credit history
  • Credit mix, i.e. type of loans including secured loans (such as housing or auto loans) and unsecured loans (for example, personal loans or credit cards)
  • New credit, i.e. the number of times you apply for fresh loans or credit cards, which indicates your financial solvency and dependency on debt

What causes damage to the credit score?

Below are some of the factors that impact your credit score:

  • High credit utilisation ratio
  • Delay in bill or EMI payment, or skipping a payment altogether
  • Applying for multiple lines of credit, for example: several credit cards to enjoy the initial benefits on joining
  • Having no line of credit can also go against you, hence for instance, getting a credit card to establish good credit history is a prudent alternative

How does one repair the credit score?

The first thing to do would be to call for a copy of your credit report from any of the credit bureaus. With the process being online, it is simple and hassle free and your report (together with the score) will be made available you upon payment of a nominal fee. Once you have received the report, do go through it at length and check for any incorrect or inaccurate information therein. Every error in the report can cost you – you score can take an instant nosedive – and hence it is of utmost importance to ensure accuracy of information.

If you do have information that requires modification/ updating, do contact the concerned bureau at the earliest and request for it to be rectified. This will ensure that your score goes up, as your data is now maintained correctly.

Of course, the above does not apply in case you have unpaid loan EMIs or credit card payments against your credit report. In such instances, the only thing to do would be to make payments towards any outstanding debt and once cleared, request for the data to be updated with the newest information.

In addition to this, plan and budget your spends, and do not tack everything on to your credit card when out shopping. Further, do not utilise your credit card limit to the max, an ideal credit utilisation ratio across all your cards does not exceed 30 percent of the total card limit.

This will help you going forward as well, in making sure your card complements your lifestyle and does not entirely sustain it.

A credit health management company can also help, by assigning you a trained credit counsellor who will work with you to improve credit score over a period of time. While the task may seem challenging and uphill, it is not entirely impossible and with time, patience and financial discipline it is indeed something that is achievable. Credit Sudhaar, India’s premier credit health management company is one such organisation that you could approach.

The bottom line

A large part of your financial future depends upon your credit health so it is never too late to know more about your credit score and if it warrants attention, to do so before it is too late.

CIBIL is keeping an eye right from your first credit card

Have you ever wondered as to who keeps a watch on your financial dealings when it comes to having availed of credit, be it a loan or a credit card?  Do you have a credit bureau watching you, or is it the lender or both? Here is a brief insight into the world of credit health.

Tell me more about CIBIL and credit bureaus

CIBIL is India’s oldest credit information company, or credit bureau, that has been licensed to operate by the Reserve Bank of India (RBI). CIBIL was incorporated in 2001 and has been providing credit bureau services since 2003 for banks in India. A credit bureau generates credit information reports that provide a wealth of information regarding an individual’s credit history, both past as well as ongoing. These credit reports are summarised by credit scores, which typically range between 300 and 900. A high credit score indicates better repayment behaviour and satisfactory credit hunger of the consumer.

In addition to CIBIL, there are three more credit bureaus, namely Equifax Credit Information Services, Experian Credit Information Company of India and CRIF High Mark Credit Information Services. These bureaus were granted licenses in 2010 and since then have been working closely with banks and financial institutions to fill in gaps that were present in the market at the time when there was only one credit bureau.

These bureaus also have expanded the data coverage and introduced specialised segments such as microfinance (MFI) loans. This data is also now available with the credit bureaus in addition to the commercial loans and consumer loans data traditionally available with the bureaus. There is a mortgage check repository also and a separate database for fraud checks; bureaus have also been working to get more and more data into their databases and like in some other countries with time telecom and insurance data may also come to credit bureaus in India. This will greatly help a lender establish whether they want to extend a fresh line of credit or not. For example, if a borrower features in a fraud report, the next lender they approach for credit of any kind is likely to decline the application.

Credit bureaus and the RBI

As per the Credit Information Companies Regulation Act, 2005 (CICRA) the RBI is the regulator for credit bureaus and over the years has brought in several robust guidelines and policies to monitor bureaus. As per the latest guidelines, lenders are required to submit data to all bureaus. This means that every bank or financial institution is required to become a member with each of the bureaus present today. This is a significant move to ensure that credit history and repayment behaviour of all types of borrowing is available with all the bureaus.

Apart from bureau data, the RBI also requires credit bureaus to share a list of wilful defaulters, and this data is published on the RBI website.

What does a credit bureau check?

A credit bureau maintains the credit history of a borrower, detailing in its reports the repayment track record of a borrower. When you approach a lender for a loan or apply for a credit card, the first thing the lender does it to pull a copy of your credit report, which helps them gauge both the willingness and ability of a borrower to repay any outstanding debt.

Bureaus however do not make any changes or modify this data either in entirety or in part. They merely put together the data received from their member institutions, i.e. banks and other financial institutions. Essentially, bureaus don’t track individuals they only maintain and organise the data submitted by lending institutions.

Hence, from the time that you obtain your first credit card and right up to your existing home loan, for example, the lender(s) you have borrowed from will be the entities that monitor you closely, and not CIBIL or any other credit bureau. This monitoring is translated into your credit health, which needs to be maintained as you would your physical well being.

How does one track the credit score?

The first thing to do is to call for a copy of your credit report from either one or all bureaus. Once you receive the same do go through it at length and also check the score. If you think the score is not on par or you need help to improve credit score, consider availing of the services of a credit health management company. In tandem with trained credit counsellors you will be able to restore your credit score and even enhance it over time.

Therefore be it your first credit card or current home loan, make sure you maintain credit health.

 

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.

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.