24-Sep-2016 written by : FSI-Team
Globally, your credit score holds more relevance than you would imagine – it can be the deciding factor between your being able to rent an apartment or a house, getting a new phone connection, determining the premium you would pay on your insurance policy and in some instances, even getting a job. Closer back home, in India, credit scores are currently used predominantly in the banking and financial services (BFSI) sector, with lenders (banks as well as other financial institutions) evaluating your score before agreeing to extend a fresh line of credit to a borrower.
A score is important because very simply, to a lender, it is a good estimate to understand a borrower's creditworthiness, which is nothing but their ability as well as intention to repay a loan. And this is why it becomes important to keep track of your credit score, to understand your credit rating and ensure that at all times, the CIBIL rating as a result is high or 'good'. Do keep in mind that a higher score is something that every lender looks out for, when underwriting a loan or reviewing a credit card application. With CIBIL for instance, a score of 750 and higher (of a possible 900) is considered to be a good score, one that can be your gateway to good financial health. Let us see how.
When a lender reviews your loan or credit card application as mentioned, the credit report is their first go-to document on the basis on which a lending decision is made. Let us look at an instance wherein someone has a poor score, which may likely mean application rejection. Hence, the individual stands to lose out on the opportunity to say for example buy their dream home or car (for which they were availing of this loan), which could well be a financial loss as well. For when you consider making the same purchase some time later the prices may have increased.
Another factor to be considered is that while a loan may not be outright rejected because a lender considers other factors (including income, expenses, existing debt and other obligations) as well, in addition to the credit score, a low score could mean that the loan is approved, but at less than optimal interest rates and other terms. Two individuals, of which one has a higher score, is likely to have a loan approved at a lower rate which over the long term reduces the cost of purchase because you wind up paying a lower amount overall, the interest amount being lower.
Thus, monitoring your credit score helps you save money in the long run, which in itself is reason enough to know your CIBIL rating.
If you look at the United States, for example, every credit information bureau is obligated to provide one free credit report annually to an individual. This is typical of most developed nations. Thus if timed well, you can track your credit health three to four times a year, at absolutely no cost. There are a range of options available to get both the report and score online for free.
What happens in India, then? In India, currently none of the bureaus offer a free CIBIL report, each of them can make available reports (in tandem with the score) at a nominal cost. The process to request for a score too is easy and hassle-free, with the transaction (including payment) being carried out online. Once you provide some basic information, the details will be in your inbox typically within 72 hours.
There are four credit bureaus in India at present offering this facility, namely CIBIL, Equifax, Experian and CRIF High Mark. You can call for a report at your convenience from any or even all of these bureaus, in order to monitor your credit health.
As per the Reserve Bank of India (RBI), India's apex bank, at least one base-level free credit report should be provided to borrowers a year (from January to December), on demand, so that they are able to review the data and have any errors or incorrect information modified. This will be in line with the practice followed by all developed countries. Another caveat added is that the report should be devoid of jargon and be easy to interpret and understand even by a layperson. This practice will need to be implemented by all bureaus from January 01, 2017.
Given the importance of this information therefore, it is prudent to avail of the free credit report once it comes into effect, and until then, consider availing of one in any case, to remain credit healthy.