There was a time when borrowing used to be considered almost a sin. Whereas today, you name a requirement and a loan is available for you from not one but many resources. Whether you want to buy a house, your dream car or be it a loan for financing working capital requirements of your business, you can simply apply for a loan provided there are no negative flags on your credit report. Through today’s column I want to highlight the importance of credit reports in ascertaining credit worthiness of borrowers while applying for loans through banks and other financial institutions.
What are Credit Reports?
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A Credit Report is a detailed analysis of an individual’s credit history. Credit bureaus such as Credit Information Bureau (India) Limited (CIBIL), Equifax, Experian or Highmark collect information based on a formal system of data exchange by financial institutions that have extended you credit in the past such as credit card companies, banks etc. They then create Credit Reports and rate each individual by giving scores based on detailed analysis of the data collected. A Credit Score is a three-digit number indicative of your credit behaviour. Lenders use these reports/scores along with other details to determine loan applicant’s credit worthiness. For instance if you regularly pay your loan EMI’s on time, your bankers will report this positive information, which then will reflect positively on your Credit Score. But if you start to pay late or miss payments altogether, your bankers will also report this negative information, which could lower your Credit Score. A high score means you have good money-management skills and that you repay your debts on time. Likewise, a low score raises questions about your financial credibility. In a nutshell, your Credit Score tells financial institutions whether they can extend credit to you or not. A good Credit score means you are a safe bet, and a bad score translates to ‘uh-oh, maybe next time’!
Evaluating scores
Just as you are evaluated by any examining authority, credit bureaus evaluate your credit worthiness. Credit Scores range from 300 to 900 points. The closer you are to 900, the more confidence the lending financing institutions will have in your ability to repay the loan and hence, there are better chances of your loan application getting approved. Anything above 750 is considered a good Credit Score. There is no threshold for minimum score, but statistics show that more than 80% of housing, auto, or personal loans are sanctioned for Credit Scores exceeding 750 points.
Knowing your Credit Score
From 1stJanuary 2017, RBI has made it mandatory for all credit information bureaus to give one free credit report once in a financial year to every individual who asks for it. The central bank has asked credit bureaus to put the process of accessing a free report on their respective websites, which the companies have done. The process requires simple online authentication. However, if a consumer fails to authenticate himself/herself online, he/she can send scanned copies of the Know Your Customer (KYC) documents such as Permanent Account Number (PAN), passport and recent electricity bill for back-end teams to verify the consumer before releasing the report. Alternately you can log in to websites like bankbazaar.com and obtain your credit score for free by providing necessary inputs in a matter of minutes. The Credit Score is updated on a monthly basis based on the relevant information provided by financial institutions. It is advisable to keep an eye on the Credit Score to determine your financial credibility while applying for a loan or a credit card. It will help you in avoiding a situation where your credit application is rejected due to a poor score. Monitoring the score on a regular basis will help in identifying mistakes and correcting errors before they are too late.
Not so long ago loans issued by banks were given on personal goodwill of their valued customers, and the customers repaid the faith in equal measure by paying back without defaulting. But as times have evolved the confidence of financial institutions has dwindled mainly on account of rising defaults and increasing percentage of non-performing assets (NPA’s) and hence they have resorted to verifying borrowers credentials to safeguard their interest. So the next time you think of availing a loan, it won’t be a bad idea to check your Credit Score before the financial institutions do so. After all the best person to face the problem is also the best person to fix it- that is you.
