The Importance of Good Credit

If you have ever taken a loan (personal, auto, education, home etc.), or if you have a credit card, or if you have bought products on EMI, you should have a credit history and a credit score.

A credit score, in this case a CIBIL score, is a 3 digit number based on a snapshot of your credit report that helps a lender determine your ability to pay back debt (your score = your credit risk). This score ranges from 300 (worst) to 900 (best). This score plays an instrumental role in loan approval. The closer your score is to 900, the better are the chances for your loan approval.

Your credit report contains four important areas of information.

• Personal: Name, Address, PAN no, Date of Birth and employment information
• Credit History: Types of accounts, the date you have opened the account, your credit limit, the account balance, payment history
• Public Records: Foreclosures, Garnishments, Legal Suits and judgements
• Enquiries: List of creditors that have accessed your credit report in the past.

CIBIL scores are one of the most widely used credit scores and are based on the following factors:

• Payment history: Looks at items such as late payments and bankruptcies. These defaults can hurt your credit score.
• Amounts owed: Considers your debt and your available credit lines. The more you owe compared to your credit limit, the lower your score will be.
• Age of credit history: Checks how long you had your credit accounts and how often you use them. A longer credit history will usually increase your CIBIL score.
• New credit: Looks at new credit accounts you opened and new credit requests (such as credit cards). Multiple credit requests represent greater credit risk.
• Types of credit used: Considers how many credit accounts and how many instalment-type accounts you have. A diverse credit portfolio can strengthen your report.

Introduction of credit score and credit history tracking will result in several benefits for you as a consumer-

• Faster loan approval as the credit scores are readily available to the banks and lenders. Home loans and auto loans that used to take weeks earlier can now be approved in 2-3 days or less for a person with good credit score and credit history.
• Wider options to qualify for the best loan and rate in the market if you have a good score.
• Loan/credit approval decision are fairer as rather than looking at your city, gender, religion, family background etc., lenders can focus on your personal credit report to decide about your loan application.

Only you and the financial institutions that you authorize (usually when you sign an application) for credit processing can view your credit report. However in some cases, some banks check your report prior to giving you a pre-approved loan or credit offer.

If you have never checked your credit report and score, you should do it now for two main reasons. First, checking your report will give you an idea about your current credit profile and what can be done to improve your score. Second, you can identify any issues in your report such as wrong information, any fraudulent activities such as accounts that you may not have opened etc. You can dispute any wrong information in your report with the bureau and get it corrected to improve your score. If you have accessed your credit report at least once earlier, it is recommended that you access it annually to keep track of your credit score movement. Moreover, if you are trying to improve your credit score before a big loan application, it may make sense to start tracking it on a quarterly basis.

No. Credit history along with the specific lender’s loan underwriting policies determines whether you get approved for a credit card or loan. For example, a credit score of 750 may be good enough for one financial institution to issue a loan, provided you meet their other requirements. On the other hand, another service provider (who may be more risk averse) may not issue a loan to you unless you have a score of 800+. If more than 50% of your net income is utilized to pay off existing loans and EMIs, you may not get a loan approved even if you have a very good score, as the additional burden of debt on you may mean your inability to pay loans on time. In other words, your Debt Servicing Ratio (Monthly Loan and EMIs payment / Monthly Net Income) should be less than 50% for you to be approved for a new loan. Credit score and credit report nevertheless plays an instrumental role in any credit decision by lenders.

CREDIT REPORTs have been widely used by loan providers to evaluate loan applications for over 5 years. However, it is only recently that people have begun to realize, how crucial it is to be aware of and maintain a good credit history. Understanding the CIBIL credit report helps you identify the right time in your financial life cycle to apply for a loan and increase the chances of a loan approval. Listed below are the most important attributes looked at by a Loan provider while evaluating your credit application.

• Attribute 1: Payment History This appears in the Account(s) section of your CIBIL credit report. There are 2 parts to this information: the Days Past Due (DPD), and the month and year of payment. The DPD indicates how many days the payment is late that month. Anything other than “000” is considered negative by a Loan provider. Up to 36 months payment history (with the most recent month displayed first) are provided in this section.
• Attribute 2: Current Balances Also appearing in the Account(s) section of your credit report, is the current balances on various loans, indicating the depth of your debt. The sum of your current balances to Loan providers, determines your strength to take on additional EMIs, in relation to your current income. Naturally, lower the current balance, the better the chance of your loan getting approved.
• Attribute 3: New Credit Facilities If a loan provider observes that you have recently been sanctioned a number of new credit facilities; it would mean that your monthly outflow in terms of EMIs has increased. Hence, it may have a negative impact on your loan application.
• Attribute 4: A number of new Enquiries If you have applied for a number of loans in the recent past, the chances of your loan getting approved are likely to suffer. Simply because, this credit behaviour indicates you are “Credit Hungry” and in an urgent need of money. It is likely to make Loan providers more cautious while evaluating your credit application.

Each time you apply for a credit in the form of a loan or a credit card, the creditor may obtain a copy of your history. This action is called as an enquiry and it is recorded in your credit history. Too many enquiries within a short period may have a negative impact on your score and credit history. Lenders may assume you are trying to get as much credit as possible and may identify it as if your spending is out of control. (though it may not be the case) Rest assured, when you request a copy of your credit report (which is recommended periodically) it may not negatively affect your score.

It can impact in both ways. If you have taken an education or student loan and are making timely payments of the EMIs, it will help you in building credit history and a good CIBIL score. However, if you are late in paying the EMI and/or have defaulted, it will have a negative impact on your CIBIL score and history. Therefore, if for some reasons you are unable to pay your education loan, please work with the bank or your lender to get an extension on the loan or change of terms of the loan. It’s imperative that you are in good standing on your education loan, as it will impact your prospects of future loans such as a car loan or a home loan.

All your payment transactions and history are being reported to the credit bureau by the loan provider. Therefore, if you are not making payments on time, it will reflect in your credit report and negatively impact your CIBIL credit score. If you default on any of your secured or unsecured loans, it may reduce the possibility of you getting a loan in future. So please ensure that you pay all your bills on time. If you are not able to meet your EMI obligations, please work with the lender to make some alternative arrangements, if possible.

It may. If you are financially dependent on your parents/relatives or they are acting as guarantors of your loans, any negative credit history pertaining to them may reduce your chance of getting a loan.

The answer is ‘Yes’. Several companies from Finance, IT and other sectors have started to check the candidate’s credit score and credit report as part of the background check process. This phenomenon is more common at senior level hiring. Quite a few companies (mostly multinationals) will run a worldwide credit check (e.g. USA, Canada’s FICO) on you. If your credit report or credit score show major issues in terms of your debt repayment history, you may not be selected for the job you have applied for. If the employer is not able to access your report directly, they will ask you to submit this report along with rest of the documents required by the company.

Your credit history, other than your income, is the single most important tool used by a Loan provider to evaluate your application for any loan or credit card application. Naturally, it’s important that you understand your Credit Information Report (CREDIT REPORT) and what it takes to maintain a credit history, so that is viewed favourably by Loan providers. Good credit history can be maintained by following these 7 simple guides:

• Always pay your bills on time. Late payments are viewed negatively by Loan providers and may affect the chances of your loan getting approved.
• Keep your balances low. While the balances on your loans will only reduce over time as payments are made, you must be diligent about making timely payments of credit card dues. Further, you should control your utilization. For example, if you have used Rs. 90,000 out of a credit limit of Rs. 1,00,000, this may be viewed negatively by a loan provider. It’s always prudent to not use too much credit.
• Maintain a healthy mix of credit. Your credit history should contain a mix of a home loan, auto loan and a couple of credit cards. A high number of credit cards only, affect the chances of a loan approval. You may wonder why this should be so? Although a credit card offers easy access to finance, it’s also by far the most expensive form of credit. The more the number of credit cards with high utilization, the larger are the payments resulting from its high rate of interest.
• Apply for new credit in moderation. If you have made many applications for loans, or have recently been sanctioned new credit facilities, a Loan provider is likely to view your application with caution. This ‘Credit Hungry’ behaviour indicates your debt burden is likely to, or has increased and you are less capable of honouring any additional debt.
• Think twice before closing credit card accounts. While, using credit cards may negatively impact your credit history, unused credit cards actually imply that you are financially secure. This makes Loan providers view your application more favourably.
• Monitor your co-signed and joint accounts monthly. In a co-signed or jointly held account, you are held equally liable for missed payments. This is extremely important because your joint holder’s negligence could affect your ability to access credit when you need it.
• Review your credit history frequently throughout the year. Unpleasant surprises in the form of rejected loan applications can be avoided by ensuring that your REPORT accurately reflects your current financial status. So reviewing your credit history 3-4 times each year is imperative.