Is credit score important for financially secure people?

Financial security is extremely important to people in all industries and from all walks of life. This means security is not only for the present, or in terms of business, where the current assets match the current liabilities in a 1:1 ratio, but it also implies that the future is secured for you, your family and your organization. Credit score analysis is being used increasingly by more and more institutions to judge if a person is worth the risk of extending a loan or credit card too. It is nearly impossible for anyone to have financial security without having a good, if not impeccable credit history.

Let’s look at some facts and figures.

1. It is interesting to note that there is a very clear relationship between the age and scores of people in India. Senior citizens are said to be the most secure in terms of scores whereas people in the age group of 25-35 are said to be the riskiest. These figures are collected not just from people in India, but also from many other nations where the credit scoring system is highly prevalent.

2. Financial security also largely depends on the industry or work domain you belong to. Statistics show that while people belonging to the real estate and IT industry have people with some of the most stable credit scores, people engaged in manual labour tend to have lower scores. This point doesn’t have any intention to degrade any profession but is just a statistic. You could have a credit score of 850 even if you work as a truck driver provided you maintain your loans and credit card payments well and at the same time, a software engineer who spends more than he earns could have score in the low 500s.

3. There is a definite upswing in the employment records of the country. In the year 2010, the unemployment rate was about 9.4%, but in the year 2014, it dropped to about 4.9%. Another point to be noted in this section is that the unemployment rate amongst the youth has dropped from 18.10% to 12.90%. This means the younger generation has more available money to save and spend.

Coming to the crux of this page, based on the above details, we can clearly make out that more and more people are becoming financially secure, even after they retire. So does one really have to worry about credit scores so much? The answer is – you should always stay on top of the credit game, no matter what your age and employment situation is. Here are some of the scenarios which may lead to fluctuations in your disposable income, thus affecting your credit score directly

1. Your company may stop increasing your salary.

2. The inflation rate of India varies from time to time but your income is not always that flexible.

3. As time passes, your productivity and enthusiasm to work may also decrease.

4. Many industries have cycles of ups and downs and you never know when it might be your industry’s turn.

Credit score repair agencies and your own efforts may help repair most of the damages, but it is advisable to always have good credit scores by having a strong financial credit history so you can avoid being victims of such circumstances in the first place.

Let your credit card help your credit

Applying for and getting a credit card is considered quite easy now-a-days. You may have heard many of your friends and acquaintances getting several calls and online offers for credit cards with attractive reward points and cash back benefits. You may have got a few of them yourself. But did you know that credit cards are not only helpful to spend when you don’t have ready cash or a balance in your salary or savings accounts, but they also help in growth of your CIBIL credit score?

How does one qualify for a card?

Just because you have got an offer (some like to call if a pre-approved credit card), it does not mean you will certainly get the card when you apply for it. Just like any other credit such as vehicle or education loans, you must submit an application and provide adequate documentary evidence such as your ID and address proofs and your employment details. The three main criteria lending institutions look for are, firstly, your ability to repay the requested debt (IT returns or Form-16), secondly, what is the value of the collateral (say, a fixed deposit) you are offering for this instance of debt, and thirdly, the most important criterion today for banks is your willingness to repay – that is verified by analysing your credit history and your 3-digit credit score. When your credit score and other loan eligibility documents are all satisfactory, you get a credit card approval. The credit limit and card terms also largely depend on your credit history. CIBIL credit scores can range anywhere between 300 and 900, scores above 750 being preferred by 80% of banks today.

How does a card help your credit?

Coming to the main topic, let us see how a credit card can help you with your scores:

1. Provided you make your monthly payments for your cards on time, whether it is the minimum payment or the whole balance, your credit score will improve.

2. If you keep the outstanding balance of all your credit cards less than 30% of the combined credit limit, banks consider this to be an excellent balancing of debts and incomes and this also improves your credit score.

3. If you have credit card accounts which have been active for a long time and on which you have been making regular, timely payments, do not cancel such accounts. These contribute to a large extent in keeping your scores high.

4. Before you apply for a credit card, think if it is really necessary. If you already have 2-3 cards, it is not advisable you apply for another credit card. If you have too many such cards, banks may consider you to be a slightly higher risk than usual and will deny you a loan in future. So to get a card which you don’t really need, you are giving up your chances to qualify for a much more important loan when the need for it actually arises.

5. Provided you monitor your credit scores and credit report regularly, you will know exactly what the status of your credit cards and their balance are in terms of improving or deteriorating your credit score. If you find any information about your card that has not been updated correctly by your bank, you should approach the bank and CIBIL to get this rectified immediately.

Using your credit scores wisely is a very wise move for your month-to-month finances as well as your long-term credit reputation. So start handling your credit cards with care today!

When the banks don’t get it right

Credit information companies in India rely completely on information that is provided to them by their member banks and financial institutions. CIBIL is the premier credit information company in India and already caters to millions of individuals and business entities. Due to the sheer volume of information it collects from the banks, there are chances that your records don’t get updated correctly or as quickly as they should as per RBI guidelines. Similarly, it would be unfair to assume that all banks perform their duties very precisely with absolutely no errors. The occurrence of such issues is rare, but there are many such cases that have been brought to light in India.

These issues are not noteworthy to CIBIL and the banks, but for common people like us, it can create a huge financial and legal mess. It is, therefore, important for you to be determined and vigilant about your credit scores and reports to be maintained correctly. How do you do this? The process is quite simple – you ensure you obtain your credit report at least once a year and check your score and all the other details in it very minutely. The moment you find something incorrect, some information missing or fraud activity in your name in the report, you should leap into action and get as much information about them as possible.

Let us, for example, assume you have an auto loan that was opened in 2012 and has another 5 years to run. You have set up a bank mandate for auto-clearance or ECS scheme under which your payments are electronically collected by the lending bank from your funding bank each month on a specific date. In the past year, the account from which you pay the EMI was compromised, and hence you requested a different account to be allocated to you. The bank did do that and you provided the new bank details along with the relevant “change in payment account” forms to the loan bank. The latter, however, failed to update their records due to which the payments have not been collected at all in the past few months. The consequences of these late payments are horrendous on your credit score – they drop dramatically. Plus you are harassed by collection agents for absolutely no fault of yours.

So, what do you do in such cases? Here are a few ideas for you:

1. You approach the lending bank and ask them to amend their records immediately, asking them to collect the outstanding amount and collect the future payments on time based on the ECS mandate you have issued the lending bank.

2. Request the bank to expunge all negative records on your credit report which would have been added due to the non-payment and negative information they would have sent to CIBIL.

3. Escalate the matter to CIBIL if the bank does not co-operate and they will in turn remind the bank. CIBIL just passes on our request to the bank and only reports what the bank has to say – consumer has no say in the matter other than legal recourse if the bank does not agree to the consumer’s claim.

4. Approach the financial and/or bank ombudsman in India if the bank refuses to make the changes on time and makes all reports to get your credit score to back where it was.

Many customers have already benefitted by being alert and contacting their banks, CIBIL, legal counsel and the ombudsman immediately. The key to succeed in correcting your report lies in speed, observation and determination.

Are credit scores really important?

Although India was one of the richest countries in the world with a wealth of knowledge, precious stones and metals, it slowly opened up to the concept of credit scores and their importance quite late. Now, if a person were to apply for any form of credit – card, loan or overdraft, they will have to face the test of credit scores before they can proceed. There are very few banks which do not consider credit scores before they approve a person’s application. So, it is safe to say that the next time you think about a debt application, you should also be concerned about where you stand with your credit rating.

In India, there are a few private companies that collect details of a person’s credit history and maintain a credit report. But the most important player in this field is CIBIL. It works as per the RBI’s norms and has a huge responsibility towards the individuals whose financial history they keep a track of and to the institutions who rely on their information to lend their money to the applicants.

Where there is money involved, there are many people who try to take advantage of adverse situations and make a profit for themselves by exploiting others or outright duping them. There have been cases reported to CIBIL and other financial watchdogs of some large, private banks which falsely promise people to extend loans without a credit score and later charge exorbitant fees to extend such a loan. There are two problems to this:

1. You submit all the documents required along with the application to a DSA (direct selling agent associated with multiple banks to assist clients in their loan applications) and the bank then scrutinizes it and rejects your application anyway. Suddenly you wonder why there are so many enquiries made on your behalf with banks. Your confidential information may be falsely used by DSAs or one of your own staff/acquaintance and in addition to not getting a loan, you may become a victim of fraud.
2. Every time a bank makes an enquiry with CIBIL about your credit history, it is known as a hard enquiry. If there are too many such enquiries, your credit score gets negatively impacted and becomes lower than what it was before.

The other interesting thing that one faces in such situations is when their low credit scores or poor financial track record gets passed on to the so-called “debt doctors” who immediately start making marketing calls and try to lure you with the hope of improving your credit scores in an astonishingly low amount of time for very high fees. Prices can range between INR 8,000 to INR 16,000 and you are offered various schemes named silver, gold and platinum. You should, however, stay away from those which have tie-ups with banks and earn a profit out of and be helping them recover an inflated amount of settlement monies and out of you by charging you false, high fees for practically no good service provided.

But, there are certainly some credit score improvement consulting agencies that make genuine and expert efforts to help you regain a good financial standing and in a position to get approved for loans and credit cards in future. But the best solution is to nip the problem in the bud and always maintain a good credit history.