29-July-2016 written by : FSI-Team
The concept of credit reporting and scoring is shrouded in a bountiful of myths & misconceptions. Some of these myths have been blown out of proportion and they sound real. One should not allow incorrect information to influence their financial decisions. Let us shatter some of these myths and clear the air for our readers.
This is a very common notion about CIBIL. For starters, there is no such thing as a CIBIL report defaulters list. CIBIL is only a repository that collects, records and maintains data on individual and commercial borrowing. It doesn’t classify consumers into any risk categories. The decision to extend loan solely and entirely depends upon the credit institution and its internal policy, conclusions it draws from your credit report and other factors such as incomplete documentation, income etc.
Another common notion is that if you have no score or credit history then it means that you have never defaulted on any of your financial obligations. However, banks and other financial institutions believe that if you don’t have a score then they have no parameter to measure your credit behaviour. The stakes are high that your application will be turned down. Thus, having a small loan or a credit card, which is repaid in time every month, is better than no credit relationship at all.
Whether you are a senior citizen, military personnel, influential personality, a celebrity, kin or friends with someone who can throw his weight around, no one receives a special attention in their reports. Your credit report is based on only your credit relationships, amount outstanding, amount over due, amount repaid, types of loans etc. It has nothing to do with who you are in your personal or professional life. Similarly, whether the previous occupant of your current address was "a prince or a pauper", it will have no effect, whatsoever, on your score.
Nowhere in the document is your bank balance mentioned. Do note your income, monthly salary, performance bonus, bank balance, etc has any bearing on your score. Your score is free of gender bias, racial bias, a minority group bias or any political intervention. None of these can help change your score. It is solely based on what you do with your borrowings and how do you repay them back. Please don’t believe someone that a higher income means higher score.
Credit consciousness does better than just get you easy loans. Fact is insurance companies do check your report to formulate their own insurance score which is used to calculate your premium, based on your risk profile. Similarly, telecom companies want to judge your financial responsible behaviour through your credit report. Employers check credit reports to see if you have been responsible with your personal funds and thus decide on your eligibility.
Personal enquiries are considered to be “soft enquiries” and have no bearing on your score. Only when a credit institution enquires into your report in response to a debt application by you, it is considered a "hard enquiry" and impacts your score negatively. Infact, too many credit enquiries within a short period of time are also treated as a single enquiry. When there are too many enquiries at intervals it means you are constantly on the lookout for financial aid. This rings the bell for probable creditors and your score points drop.
When you visit CIBIL website, you will find that CIBIL is now offering a bi-annual & quarterly subscription service to consumers for personal enquiries. Alternatively, if it still bothers you to enquire into your report at a cost then, you could log on to www.freescoreindia.com. It provides you with a legitimate and correct score.
This couldn't be farther from truth. Lenders are more concerned about your current and recent financial obligations and how you are servicing them today. They are least interested in a missed payment a long time ago as it says nothing about your credit behaviour today. It does not mean that you can miss payments occasionally and forget about them in the long run. Do note the "Days Past Due" schedule holds information for the last three years. But the credit score is based on information of past two years only. However, if you have settled an account or left it unpaid, that information can be there on the report for seven years or sometimes for even longer than that unless the credit institution involved sends an update on that record.
Before you step in as a co-signer for your kin or stand as guarantor to your friend's loan, do know that in the lender's eyes you are as good as the borrower. This is because incase the borrower defaults their payments then you are expected to make them good for the lender. And if you don't fulfil this obligation, it will be treated as if you have defaulted a loan in your own name. It will certainly affect your score poorly and will be reported in your credit report.
Breaking this stereotype, let's just put it straight. When you decide to cancel any of your credit cards it brings down your available credit limit and at the same time inflates your utilization ratio. A higher utilization ratio actually leads your score to decline. But, this should not keep you from cancelling cards that you feel must be cancelled.
Regardless of the myth, do know that your score is not etched in stone. It can certainly change depending upon your credit activities and with updates sent by credit institutions every month. A poor score is not there to haunt you for your life. If you will work consciously to improve it, it will certainly increase.
Incase there is incorrect information in your report you must raise a dispute with CIBIL. The bureau will then check with the credit institution involved from where it got the information. The bureau will update according to information received from the bureau. It really has no autonomy over making changes to a report.
It's true that in India, Credit scores are loosely referred to as CIBIL score as well. That is because CIBIL was the first bureau to be established in India. However, there are three more bureaus now operating in India. They are Equifax, Experian and CRIF Highmark. They too provide credit scores. Whereas CIBIL scores imply credit scores that are given by CIBIL.