How many of you remember your student days when someone borrowed money from you and never paid it back? I am pretty sure that the borrower did not earn a good reputation. In fact one would get weary and uncomfortable of lending money to that student! — This brings out the need for credit history.
Today, people who don’t payback their dues would find it impossible to obtain a loan (car loan or home loan or personal loan etc.) because of the well-organized and institutional way to track the repayment record or credit behaviors (credit history) of both good and bad borrowers.
The credit history is made accessible to lenders and borrowers. Lenders (banks or non-banking financial institutions, NBFCs) use it to ascertain the loan amount, rate of interest, or even if the loan should be sanctioned or not. For borrowers, it helps to know where one stands and what needs to be done to improve matters.
Need & Importance: For the economy to function smoothly, it is important that consumers have access to credit and are sincere towards repayments. Otherwise, the entire consumer economy could collapse.
Most of us take loans one time or the other to buy a car or home or even consumer durables. Some take loans for a foreign vacation or wedding. Currently borrowers pay similar interest rates irrespective of the track record – good or bad. But this is changing. Because:
- Form 1st July RBI guidelines ensure that banks will follow the base rate system to price loans. Banks will add a risk premium that will be specific to the kind of risk that the bank perceives you to carry, based on your creditworthiness (on previous history).
- Banks are increasingly accessing your “credit history” or your past records if you have taken loans and analyzing how disciplined you have been to pay them back on time and in full.
To make these information accessible specialized institutions called credit bureaus have been authorized by the RBI to be set up. CIBIL is one such bureau which records factual data of timeliness in payment of loans including credit card borrowings, history of cheque bounces and the number of applications made to access credit (whether through credit cards, personal loans or other types of loans).
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Tags: credit history needs, credit hostory, Deal4loans, Importance of credit history, loans