Big Brother is watching! Credit Scores and their Importance.

When you approach a bank or a non-banking financial company (NBFC) for a loan,  the institution runs a background check on you from its own database and also from a credit information bureau. The number they are searching for to assess you is called a Credit Score and not having this healthy may mean denial or higher rates.

What is a credit score?

A credit score is a 3-digit number that shows you the numeric summary of your credit health. This score is obtained by RBI licenses Credit Bureaus (TransUnion Cibil, Equifax Credit Information Services Pvt. Ltd, Experian Credit Information Co. of India Pvt. Ltd and CRIF High Mark Credit Information Services Pvt. Ltd) , by analysing your credit history. It is one of the determining factors for the approval of a loan or credit card application.

This score usually ranges from 300 to 900 points and higher scores suggest more chances of getting approval on your loans. Scores that fall above 700 usually is an indicator of good credit management. Thus, needless to say, the higher your number, the better you look to lenders and now employers alike.

A consumer needs to have a minimum of 6 months of repayment track record on a loan or credit card or closed credit accounts less than 2 years old before a credit bureau can generate a credit score. A credit score is created as your lending and repayment relationship with financial institutions evolves.

The score with different bureaus for the same individual varies to some extent, but not significantly, as the underlying data is mostly the same. The variation in score could be due to the weight given to different categories of information by different bureaus and their algorithms.

What’s in a Credit Report

The Credit score is extracted from a detailed credit report on each PAN number. Credit bureaus list repayment history of your loans and credit cards, highlighting whether they were repaid by the due date or there were delays or defaults. Lenders closely study it to predict your future repayment behavior.

The credit report will have your account information, which has details of monthly payments for at least 24-36 months, names of banks from where you have loans, and the type of loan. It also gives the status of outstanding loans.

The enquiry section shows details of banks that have viewed your report to assess a loan application, the date when you enquired about your report, type of loan (secured or unsecured) and the amount.

Utilisation ratios on your report also states the proportion of the total credit card limit used by you. Lenders consider borrowers with credit utilisation ratio of more than 30–40% as credit hungry and hence, default prone. Hence, you must try to avoid exceeding credit utilisation ratio beyond 30–40%.

Watch Out!

Gaining a good credit score is an outcome of your positive track record which implies that you pay on time; pay at least the minimum required payment; never miss a payment while also staying within your credit limit. On the contrary, if you follow the practices that go against the ones mentioned, it may lead to bad credit signs.

If you were regular with repaying loans, including your credit card bills, your credit score is likely to be higher. This score helps banks assess your loan repayment capacity and your chances of defaulting on it.

While credit cards and loans help to build a credit history and score, caution needs to be exercised. If used carelessly, these can put you in a debt trap, and ruin your credit history too. Not just that, you should also keep your digital and transactional behaviour in check, as going forward more and more data could be used to assign you a credit score.

Is credit report available for free?

From January 2017, the Reserve Bank of India (RBI) had made it mandatory for all credit information bureaus to provide a full credit report without a charge, on request, once a calendar year to individuals whose credit history is available.

More frequent reports cost ₹300-₹400 apiece.

You can also rectify any errors that may be there, through a dispute resolution process. You can access these reports through the credit bureaus’ websites. This is a different process than the free credit score that many fintech portals offer.

Now, at a recruiter near you!

A recent study by the Society for Human Resource Management (SHRM) showed that 60 per cent of employers pull current and potential employees’ credit reports. This is done to determine how financially stable you are. Employers  have been asking prospective candidates to submit their Credit Information Report from CIBIL, at the time of their interview!

Two Important Things to Know

One important thing to note that most people don’t know is that a credit report records both soft and hard inquiries. Hard inquiries refer to the credit report requests initiated by the lenders for processing your credit card or loan applications. Soft inquiries refer to self-initiated credit report requests and those initiated by the lenders for judging your eligibility for pre-approved loan and credit card offers. Credit bureaus reduce your credit score on receiving a hard inquiry. Soft inquiries, on the other hand, do not reduce your credit score. Avoid making direct loan or credit card applications with the lenders for comparing various loan and credit card offers. Instead, visit online lending marketplaces to find the best deal available on your credit score and other eligibility parameters without impacting your credit score.

The second bit – If there is any error in your report, you may be denied loans and  you will never know why! The onus rests on your shoulders to report any errors and get them rectified. This is possible only when you check your credit score frequently. That is the only way to spot errors, if any and get it rectified.

 

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