Watch Your Credit Score

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Have you ever noticed any disparity in the rates of interest on a loan borrowed by your neighbour and your loan? Or your bank has approved your friend’s application for his car loan within a week, while your application remains pending? If yes, then the cause of such discrimination could be your credit score!

A credit score is a numerical denomination of a person’s credit files and is based on statistical analysis of figures and data received from banks, financial institutions and other money lending organizations. These scores are formulated from factors based on the credit history of the borrower.

While in USA, such credit score reports are prepared by FICO (Fair Isaac Company), in India these are prepared by Credit Information Bureau (India) (CIBIL). When a borrower applies for credit from a bank or a financial institution, the decision to lend money to the borrower is taken after going through the borrower’s credit report.

CIBIL is currently owned by a consortium of banks, but initially it was promoted by the State Bank of India, HDFC Ltd, Dun & Bradstreet Information Services India Pvt Ltd (D&B) and TransUnion International Inc (TransUnion). Bank of India, HSBC, ICICI, Central Bank and other banks/institutions currently hold stakes in CIBIL.

More so, there are couple of more versions of a credit score, but the only implemented generic score model in India is that of CIBIL TansUnion score. The TransUnion Score, through advanced analytics, assigns a number in the range of 300-900 to a borrower, based on his or her credit history. The higher the numerical value of the score, the lower is the risk profile of the individual. “Credit Score is one of the most common tools for credit lending around the world and advanced statistical techniques are used to determine the specific level of risk associated with a borrower,” says Arun Thukral, Managing Director, CIBIL.

CIBIL TransUnion scoring model uses various attributes based on credit behaviour information for determining the credit score. And while many of them are proprietary in nature, majority of the score is made up elements such as, credit utilization - how much credit is the particular consumer using?; default - how many accounts are due, by how many days and by how much?; number of inquiries - has this consumer applied for additional credit lines?; trade attributes - how old are the consumer’s lines of credit?  What type of credit does he have?  Does the consumer have a good mix of credit or is it all credit cards?.[PAGE BREAK]

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Majority of the banks and financial institutions are members of CIBIL. Therefore, CIBIL is in a position to gather data from these members and collate and disseminate it to create a detailed study or report of a borrower’s credit history. The CIBIL TransUnion score predicts the likelihood of a consumer going 91 days past due on any trade line, including credit cards, personal loans, auto loans and mortgages, within the next 12 months and is applicable across various lenders.

CIBIL does not make changes to any information on its own. It is only a custodian of information received from credit institutions. It is permitted to make changes to your credit information only when it is confirmed by the credit institution(s). Also, when an individual applies for loan or credit and manages to extinguish the liability, then his/her credit score improves, which is dependent on the changing parameters of a borrower’s information.

Each bank or lender, applies its own formula to evaluate a credit application. If one bank rejects the borrower’s application for credit owing to lower credit score, then other banks may accept it, by considering other parameters, suiting the lender’s credit and risk management policies.

Explaining the importance of credit score and its impact on the creditworthiness, Thukral avers “Credit scoring is widely being used by lending institutions in India for making reliable, fact-based and confident lending decisions. Credit score such as ours aids lenders in India to make more trustworthy and confident decisions, based on strong data and objective analytics at every stage of a customer’s lifecycle. This results in improved process efficiencies, faster turnaround times and more effective risk management.”

Benefits Aplenty

The benefits of credit score to borrowers are many. “When a consumer applies for credit, lenders can use the credit score to make faster, more consistent decisions, thereby eliminating risks of human error and subjectivity… In addition to speed and convenience, credit scoring may make credit cheaper, which means lower costs to consumers. Without objective credit scores, lenders set prices according to average risk levels or use subjective, less precise methods of evaluation. This results in products that are excessively expensive for low-risk consumers and unfairly inexpensive for high-risk consumers. By making the costs of extending credit lower, credit scoring enables lenders to extend credit to many extra customers, and at overall lower costs,” says Thukral.[PAGE BREAK]

Higher credit score portrays a good past payment history of the borrower and this might result in granting of a better term credit. Low credit score can indicate past felony and might lead to denial or expensive credit terms. Credit score helps the banks as well as borrowers. “Access to CIR from a Credit Bureau helps the bank avoid large scale adverse selection of borrowers, thereby keeping the number of non-performing loans in check. It also facilitates objectives and thorough assessment of the borrower’s credit history at the time of assessment of the borrower’s credit application itself, thus helping the bank in identifying and minimizing concurrent borrowers and serial defaulters from availing credit,” opines a senior SBI official, adding “CIR helps the bank in identification of borrowers with good credit history and speedier processing of their applications.” Since new credit cannot be granted to an individual, unless any overdue (with any member bank) appearing in the CIR is settled by the defaulter and documentary evidence for the same is presented. It is possible for member banks to recover past overdue outstandings. “CIBIL scores have been extremely helpful for both the lenders and genuine borrowers, says Renu Sud Karnad, MD, HDFC, adds “One of the most tangible benefits is that the lender is able to easily find out about all the banking transactions of a customer even though the customer may have deliberately or otherwise not disclosed some of his bank accounts.”

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If a borrower receives low credit score, he/she has a chance to improve it by shifting to better money management practices, such as maintaining an appropriate, reasonable and affordable level of credit and also, ensure regular and timely repayment of loans. Whenever a borrower’s CIR and score are accessed by a credit grantor, the score is computed at that point in time. If a borrower improves his or her credit history and the like, the information will be submitted by the credit institution to CIBIL. Necessary updates are made in the CIR and therefore the score will get updated accordingly. “There are customers at one extreme who are willful defaulters while at the other extreme there would be customers who may have defaulted due to certain contingencies or certain short term problems. We do educate the customers on the importance of a good credit score,” says Karnad, adding “In India once the customers start getting benefits of a good credit score by way of may be lower interest rates or some such advantage they will value these credit scores tremendously.”

Accessing Credit Reports

CIBIL offers Credit Information Reports (CIRs) to individuals and has plans to offer credit scores in the near future. CIBIL is also developing the infrastructure, systems and processes for an automated solution that would be needed to enable an individual direct access to their CIRs. “The full fledged Consumer Relations System will have world class features that will allow consumers to access their report on-line and banks to respond to errors via an online maintenance tool. The automated phase is expected to be ready by the beginning of next the fiscal,” informs Thukral.[PAGE BREAK]

One can access his/her CIR directly from CIBIL on paying Rs 142 by Demand Draft (DD) at Mumbai in favour of Credit Information Bureau (India) Ltd. You should duly fill the CIR request form available on CIBIL’s website and attach self-attested hardcopies of your identity proof and address proof. Mail the form; the identity and address proof copies and the DD of Rs 142 to the specified address. Once CIBIL receives the documents and fees, your request will be processed and copy of your CIR will be despatched to you.

Do’s & Don’ts for Borrowers

Spelling out the do’s and don’t’s that borrowers need to follow to ensure a good credit history, Thukral avers that, “In order to ensure a good credit history, it is important for the borrower to repay his/her loans on time. Financial discipline coupled with prudent credit management and a good payment history will ensure that, the borrower enjoys all the benefits associated with having a good credit record. Making payments on time will have the most significant impact on credit record. Keep total debt under control. If total borrowings are significantly high, use some of the savings to repay some of the debt. Investigate options in order to reduce interest and other credit related costs, for instance, refinance an outstanding loan at fixed interest rates, if there is a significant drop in interest rates or you discover a significantly cheaper option and the like. This will make debt burden easier to manage. When seeking a new loan or credit card, do it in a relatively short amount of time. The credit report should not reflect that you are constantly looking for credit!”

Nascent Industry

Currently CIBIL shares its data only with its members (over 200) that include banks, financial institutions, state financial corporations, non-banking financial companies, housing finance companies and credit card companies. “Data sharing is based on the principle of reciprocity, which means that only members who have submitted all their credit data, may access CIRs from CIBIL,” informs Thukral.

India’s credit information industry is in its nascent stage and other players are about to begin their operations in India. More players will boost credit penetration in the country and bring financial discipline among individuals.

“The reliability of the CIR has increased over time, as more and more banks have started realizing the importance of timely submission of comprehensive customer credit information to CIBIL,” avers the SBI official.

The bottomline is, if you have borrowed money from a bank or financial institute, and haven’t paid back then do it NOW. A negative or low credit score could disqualify you from accessing credit from any bank or financial institution.