Banking on credit bureaus

Applied for a loan that got rejected because of a poor “credit score”, as your bank put it? Before you take out your anger on the agency that gave you this poor score, it would pay for you to know that the agency is in no way responsible for the rejection. Confused?

Then read on to find out what credit bureaus are all about, what you need to do to maintain a healthy credit score and the procedure to access your score from the agency and also make corrections to it, if any.

In India, the concept of a credit bureau has been around for only 10 years with CIBIL (Credit Information Bureau (India) Ltd) being the first to start operations. In recent times, reputed agencies in the US and Europe such as Experian and Equifax that have been in existence for several decades have also commenced operations in India.

Credit bureau functions

A fast growing economy and higher disposable incomes means that people are consuming more and are willing to leverage their cash flows and avail themselves of various loans and credit cards.

This means that banks need a suitable decision making process to assess the risk associated in granting a loan for which they take the customers’ credit report as one of the key inputs.

Broadly, a credit information bureau is a repository of financial details pertaining to borrowers.

A clutch of banks and financial institutions and broadly most credit grantors are members of the credit bureau and provide information pertaining to the loan(s) that a customer may have taken, his/her repayment history, delays or defaults and so on.

For example, CIBIL has most of the leading banks and financial institutions in the country such as SBI, HDFC, ICICI Bank and Punjab National Bank, among others, as its members and shareholders.

Experian together with seven participating banks and financial institutions have also recently commenced operations in India.

So all the data that is provided by these members pertaining to customers’ loans – home, personal loan, auto and the like (including credit cards) – is formatted into a systematic fashion in the form of credit information report.

It is important to know what a credit information report contains and what it doesn’t.

Basic details including name and address, date of birth, Pan Number, passport number and so on are present.

The financial information pertains to all loans and credit facilities availed by a borrower from various institutions, past payment history, amount overdue and number of inquiries made on that borrower by members. The credit information report does not contain income or details pertaining to the investments, savings and assets owned by the borrower.

Access to information is highly restricted and is given only to authorised persons to ensure confidentiality. The members keep sending customer information periodically so that the credit bureau can be up-to-date on all details.

Scoring credits

In order that banks and financial institutions may be able to assess the risk associated with respect to regular EMI repayment loans taken as well as credit card dues, the credit information report gives a strong basis for arriving at a decision.

Credit bureaus also give a score called the credit score based on a customer’s past track record of repayments.

The score is calculated by using analytical tools and purports to give objective quantification of a customer’s credit worthiness.

For example, a score can indicate the likelihood of a customer becoming a defaulter on one or more lines of credit within the next year.

Generally, a higher credit score indicates a more credit worthy customer.

With the help of the credit information report and the score, the bank goes on to make key decisions.

These include: to grant or reject a loan or credit card, the quantum of loan to be granted, rates of interest and other repayment terms and so on. A healthier score can enable one to avail a loan on highly attractive terms.

It must be noted that only the bank is the decision maker on all the above and the credit bureau is merely an information supplier, and hence, in no way directly influences any bank’s loan decisions.

A score may be interpreted differently by different banks and a bad score does not necessarily mean that one’s loan application would be rejected; there may still be a member bank that can offer a loan, possibly on more stringent terms.

Maintaining a good score

Financial planning experts and Web sites such as bankbazaar.com and apnapaisa.com offer tips to maintain a good credit score, most of which is actually common sense financial prudence.

These include making a budget of all your cash inflows and outflows and spending accordingly.

Making all loan EMIs and credit card payments on time is another key aspect. A credit may be used, but judiciously with spending not generally stretching to the last bit of your credit limit.

Reducing your overall indebtedness by repaying a substantial portion of loans when you have surplus cash (for example, when you get a lucrative bonus) that does not have any (other) pressing use also helps.

Any disputes/discrepancy relating to repayments must be taken up with the respective bank immediately. Till the dispute is resolved, the credit bureau flags it.

Even credit cards that are applied but never used or pre-approved card accounts must be closed with no dues, with the bank giving a statement to this effect.

Apart from all these it is also desirable to access your credit report once or twice in a year to see if the information therein is accurate.

If there is an error, one must immediately report it to the bank or financial institution concerned and have it rectified.

The credit bureau cannot do this. The corrected information is given to the credit bureau by the member bank.

CIBIL allows you to access your credit report (that is if you are a borrower from one of their member banks). This can be done by going to their Web site (www.cibil.com), filling up a CIR request form online and making a payment of Rs 142 through Net banking/credit or debit card. You will receive a registration ID and a transaction ID in your CIR form after payment.

You need to take a printout of this and mail it to CIBIL in Mumbai with a copy of your address and identity proof.

Clearly, the importance of a credit bureau can never be underestimated and with more players entering the fray, assessing the credit worthiness of a potential customer is bound to be wide ranging in terms of reach as well as the rigour required.

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Tags: cibil, Credit bureaus, Credit Card, loans, Personal Loan