Bankers’ role in your credit score

Most common people in India have the following misconceptions ingrained in their mind when it comes to the determination of their CIBIL credit score:

• If I have a very good income, there is no way my credit score can be less.

• I have never borrowed in my entire life therefore I would be one of the safest risks for a bank.

• CIBIL is the organization that decides who gets what credit score but banks do not.

• CIBIL credit score is important but there are ways of getting a loan or credit card without it too.

• I checked my credit score 5 years back and it was 800. Since then, I have not made any major financial changes so my score will remain the same or would have improved.

If you are one of them who agree to one or more of the above statements, then you would be surprised to know that ALL of them are incorrect, at least partially!

A person’s credit score depends on a number of factors, two of which are your income and the repayment pattern to maintain for all your loan and credit card accounts. There are however several other factors that make a difference to your score. But at the end of the day, it is your banker who will make or break your financial security because your bank reports information to CIBIL based on which you are allocated a credit score.

A banker’s duty

Recently, the Reserve Bank of India issued a circular to all banks across the country to update their customers’ information on a regular, complete and correct basis to Credit Information Companies (CICs). The reason behind this is that there have many disputes and complaints lodged by consumers with CIBIL and the consumer forum because they have found many errors in their credit report. Most of these errors were because banks failed to update their records correctly with the CIC.

India is a country with a vast population. And the number of people taking loans and credit cards is also increasing, thanks to the improvement in the spending capacity of the people. Therefore, there is a humungous amount of data that CICs need to collate, review, record and then provide scores based on them. But if the banks report information incorrectly, they would not be aware of the discrepancies and end up giving incorrect scores to people.

A bank must report several things to CIBIL, some of which are:

1. Details of the applicant who has applied to them for a loan or credit card and the amount required
2. Details of account opening and closing dates
3. If payments were made on time or were there any delays. If there were delays, how late were the payments?
4. What is the credit made available to the borrowers?
5. If a borrower has not paid the full sum required but has made a settlement, details of the settlement are recorded with CIBIL.

As there are so many details they have to provide, the scope for making errors also increases a lot making it difficult for people who suffer from the misfortune of having been reported incorrectly to CIBIL. Credit repair agencies play a very vital role in getting these errors corrected thereby improving the scores substantially.

Understanding how CIBIL works, better

If you are one of those who still are unfamiliar with what or who CIBIL is, it’s time you do so with haste! India, like many other European countries and the USA, has been using a person’s credit score to determine if he/she is eligible to get any form of credit – loan or credit card. Many top corporations are including a credit check as a part of their background verification process. Insurance companies and mobile service providers are also in talks with SEBI, RBI and CIBIL to use these scores and credit history for their approval procedure. In short, a healthy credit score is something one MUST have in order to secure their finances and get them at good deals. And the primary organization in India that maintains and allocates these scores is CIBIL – the Credit Information Bureau (India) Ltd, also known as a Credit Information Company.

CIBIL credit scores are three digit numbers that may lie anywhere in the range of 300 to 900. The higher your score, the lesser financial risk you are in the eyes of lending institutions. Here are a few facts about CIBIL and how it operates for you to remember:

1. How does CIBIL provide the scores?

2. CIBIL is provided data by the banks and lending institutions which are its members. The data consists of details about the type of credit, size of it, the payment pattern, when accounts are opened or closed and when customers make enquiries about getting a credit. All these details are then analysed and accordingly a score is allocated to an individual. The scores and the client details are then sent in the form of a credit information report (CIR).

3. Are credit scores mandatory?

4. Yes, more and more institutions are registering with CIBIL and depend on the scores they generate along with the client application and forms to make a decision about providing a credit card even with a limit as low as INR 30,000. So, it’s not just how much you earn and the company you work in that makes a difference. Your credit score is also very important.

5. What do I do if my score is low?

6. Low scores result in complete cancellation of credit applications or approval but with not-so-favourable terms. If your score is less than 650, you have low chances of getting any form of credit. Some simple steps such as making payments on time, maintaining as small balances as possible on credit cards, watching the number of credit enquiries you make and keeping a tab on your credit score from time to time will certainly make a lot of difference to your score in a short time. For more complicated issues, there are several qualified credit score repair agencies whom you can contact.

CIBIL and many other organizations have conducted several awareness and informative campaigns to make everyone aware of their policies and the importance of having good scores. There are several reference materials you can get from your bank and online if you are interested in knowing more on this topic.

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!

Being street smart with your credit card

India is a country where people traditionally believe in the concept of saving for a rainy day unlike citizens of many developed nations who rely heavily on credit even for their day-to-day expenses. So, it comes as no surprise that many parents still try to talk their kids out of a credit card because they are wary about their kids running up large bills but not earning as much as they should. But here are some startling figures that will surely make credit card companies smile:

1. In the 2013-2014 fiscal year, the number of credit card users was the highest after 5 years and the number appears to be on a continuous increasing trend only.

2. There are more than 20 million card users in India, with HDFC bank being the top issuer of cards.

3. Renowned banks like ICICI and SBI too are increasing the number of cards they are issuing.

So, whether we like it or not, credit cards are important financial instruments that are here to stay. Maintaining a good credit card balance and repayment history is one of the easiest ways to get a good credit score and have a favourable credit report. Credit rating agencies and firms that help you when you have a crisis with your credit scores can help you check your CIBIL score for a small fee in India. What they do not give you are helpful tips on how you can use the credit card as a means of earning some brownie points; make it an instrument to earn more than spending on it. Here are some ways you can keep in mind:

1. The majority of the population uses credit cards for fuel purchases. Most banks charge a 2.5% convenience charge for the use of cards at petrol pumps. But, if you are careful enough, you can get a specialised card that is to be used mainly for refuelling purposes and actually earn rewards points and cash backs. Popular examples of such cards are the Indian Oil Citibank Platinum Credit Card and the ICICI Bank HPCL Credit Card.

2. After fuel, the next segment that attracts the largest credit card transacting is the travel industry, in particular, the airways. There are card issuers who give you free miles which can be redeemed for your next travel when you have accumulated a certain amount of free miles. These earned miles translate into discounted air fares for your next journey. Apart from free miles, you can earn reward points that can be used for purchases too.

3. Shopping is made less painful by credit card companies. It is scientifically proven that people experience lesser grief when they see their credit cards being swiped than paying for their shopping in cash. Many stores have capitalised on this human nature and accept credit cards. What makes shopping with credit cards so pragmatic is that you stand the chance of earning cashbacks and rewards points on large purchases too. Many stores also partner with certain card issuers and offer more discounts to their card holders.

Banks, of course, partner with companies and issue credit cards which will prompt their holders to visit that particular company’s stores outlets more than others. This, in turn, leads to more revenue for the company, the banks and the consumer saves a lot in discounts too.

The mechanics of a loan application

You have recently made an enquiry about getting a loan for a vehicle and have applied for a credit card simultaneously. You have never dealt with these formalities in the past and have usually relied on your father or friend to do so for you. Now, naturally, you are curious to know what exactly takes place behind the locked doors of a bank with your application! Here is a simple guide for you to know how a loan application is processed.

1. Documents and verification – The first step that any bank takes is to collect your basic information and the details of what kind of line of credit you require and for how long you need it. The common documents you need to submit are your ID and address proofs, 2-3 photographs, bank statements, salary slips and details of present and past employment. Banks send authorised representatives to carry out personal verification of your employment and residence thereafter.

2. Contact credit rating agencies – Once you have submitted all these documents and you have cleared the verification procedures, the bank will then contact the credit rating agencies in India to get you credit score and reports. This phase is equally important as the first because many loans have been declined at this stage. When your report arrives, the banker will carefully look at all the details, payment history, comments, past loans’ details, details of your income and expenses and many other factors and will then decide if you are eligible for a loan or not. Your credit report is your history with loans and cards in the past laid bare for future review. A score of 750 and above is generally considered good (the maximum score being 900). If your verification comes clear and your CIBIL score and report are clear, as well, 90% of your loan processing is done.

3. Approval or decline – Once these checks are done, the bank will either inform you about the reasons for your decline (some even send a copy of your credit report) or will invite you for further discussions about the loan that you require. If it is the former in your case, you should carefully review your credit report and understand the definition of credit rating and factors affecting it with the help of a credit advisory company. If you have maintained your finances well, then you can expect a good rate of interest and requested loan amount from your banker. Associated terms such as low fees and rewards are also included with customer with exceptionally high credit scores. So the better your score, the better a deal you get from your bank.

4. Loan closing and funding – As the name suggests, in this stage, you sign the final documents and retain the copy that is given to you while the bank retains their copy and informs the credit agencies about the start of the loan. The money is transferred to your loan account or you get your card, and thus begin the story of your new line of credit!

As you can see, credit scores and reports play a very important role in, no matter what kind of financial institution you approach for credit. So do make sure you know more about credit scores, preferably from a credit rating advisory agency.

No report will tell you these

A new entity has entered our already much-troubled financial world: CIBIL. Now, no respectable financial institution will lend you a rupee without checking your credit rating

Besides, when you get a report, it is sometimes very difficult to understand what caused the poor score. These dark areas are important for you to maintain a stable and high credit history. Credit management consulting services will help you find and rectify credit score misinformation and rebuilding rapport with banks as you settle your debts. Get proactive about managing your credit health:

• The EMI/Income Ratio

This is one simple yet very significant aspect for your loan getting approved. If your current total EMI amount exceeds your salary by more than half, the banks will have second thoughts about getting your new loan sanctioned. This means you should go for EMI plans that help you with the ratio. Remember, you current income and existing EMIs are the key factors here, not the new EMI you are willing to pay for the new loan.

• The account information

The CIBIL score report ‘Account Information’ section. Here the details of month-to-month transaction are listed. Generally, the time frame for this list is for about three years. Having a positive credit history will always give you a sense of control during the loan discussions for the quantum of loan you are seeking and a better interest rate.

• Think before you become a Guarantor

You get your credit report and you are taken aback to find the number of loans you agreed to be a guarantor. This will have a bearing on the score and your overall credit health. Get the logic: when the bank sanctioned a loan with you as a guarantor, it was the bank’s way of getting a cover against the asset. If the person who has taken the loan fails to repay, you will be legally responsible for repaying the loan yourself.

Granted, the loan (with you as the guarantor) that is yet to be paid in full will be paid completely without your help. Still, it may be thoughtful if you think twice before becoming a guarantor. In this financially unstable economy, the banks are always too cautious to sanction a loan. Don’t suffer because you did not pay much importance to someone else’s loan history as this directly affects your EMI/Income ratio and Credit Score.

• CIBIL is just another institution

This you know yet you are afraid of your credit score as if it is written on stone and you can never change it. The CIBIL score, though generated automatically, is dependent on data supplied by banks that are run by mere mortals like you and I is susceptible to mistakes and misinformation or worse, lack of information. CIBIL Report generation is also susceptible to data retrieval errors. So pay attention to every detail on that report and look for any discrepancies there.

Knowing a report in its completeness will no doubt take some time and effort. But, that is the best way to get the most of it.