An individual relies on credit at multiple occasions. It can be to purchase a home or to finance education, or at times it can even be to finance emergency needs. While few of us are lucky to have rich friends and relatives who can give us a loan without asking any questions, most of us have to approach a bank/financial institution for a loan.
Before sanctioning the loan, these institutions look at your profile to judge your capability to repay the amount. This is done based on various documentary proofs like income tax returns, salary slips, balance sheet and other details which you provide to them.
In addition, they also rely on an important external document which shows your credit history. This document which they receive from Cibil (Credit Information Bureau (India) Ltd) gives information about your credit history and also provides the credit score based on which the institutions can make their decision.
What is Cibil?
Cibil was incorporated in 2000 with ‘an aim to fulfill the need of credit granting institutions for comprehensive credit information by collecting, collating and disseminating credit information’ about the borrowers to its members. Its members are banks, financial institutions, non-banking finance companies, housing finance companies and credit card companies. These members share the data about their customers with Cibil and in return, the bureau gives access to credit information report (CIR) of a particular individual to these members. Cibil prepares the CIR by collating all the information received from its members and provides a comprehensive snapshot of a borrower’s credit history.
For example, if you have an education loan from State Bank of India and are using a credit card of ICICI Bank. Both these institutions will submit details about your account to Cibil on a monthly basis. Now assume you apply for home loan with HDFC.
As a part of process for sanctioning your loan, HDFC will approach Cibil to obtain your Cibil score and CIR, which will provide an overview about your credit history. Your Cibil score will depend on your timely servicing of education loan and credit card dues. HDFC Bank will take this into account before taking a decision on sanctioning the home loan. Thus, both Cibil and its members rely on information sharing between themselves and act on the principle of reciprocity.
What is CIR and credit score?CIR is the factual record of your credit payment history compiled from information received from Cibil members. It contains your basic information; details about all the credit facilities availed, past payment history, amount overdue, current status, etc. It also contains details about enquiries made by a financial institution for your credit report.
Cibil score is a 3 digit numeric summary of your credit history. This score is derived based on the details found in the CIR. The score ranges from 300 to 900. Higher the score, more favourably your loan application will be viewed by the financial institution.
How does it impact?Your credit score shows the probability of default based on the credit history. Thus, the bank will be able to know whether you are capable of and will actually repay the loan. In case the credit score is not favourable, the institution can reject the loan application or may sanction the loan with lower amount or with higher rate of interest to safeguard its risks.Thus, it is in your interest to ensure that your credit score remains high.
How is credit score determined?Following four factors play a major role in deciding your credit score:
1. Late payments or defaults in recent past: Any late payments or defaults you made in past will adversely affect your credit score.
2. High utilisation of credit limits: High outstanding balances on loans and increasing balances in your credit card indicate increased repayment burden and hence negatively affect your credit score.
3. Higher percentage of credit cards or personal loans: Credit card dues and personal loans are unsecured loans whereas home loans and auto loans are secured loans. Higher the proportion of unsecured loans, lower will be your credit score since unsecured loans are more risky and have high rate of interest leading to high repayment burden.
4. Behaving ‘credit hungry’: In case you have made multiple applications for loans or have been recently sanctioned new credit facilities, it needs to be viewed with caution.This indicates that your debt burden is likely to be increased and your capacity to honour any additional debt may deteriorate which impacts your credit score.
Thus, to ensure your credit score is favourable, one needs to diligently make all the EMI and credit card payments on time and try to avoid taking loans for mundane purposes.
Can I know my credit score?Yes. Cibil allows you to obtain your score and CIR so that you can have a look at your credit rating. In case you want to view your score along with CIR, it will cost you Rs450, whereas only CIR report will cost you Rs142. Payment can be made online or through demand draft. You need to fill up the request form and provide identity and address proof and submit the documents to Cibil. On receipt of documents and payment, Cibil will send you across your credit score and CIR.
‘Written off’ or ‘settled’ status
In case the report mentions that any of your loan or dues are ‘written off’ or ‘settled’, it adversely affects your credit score. Write off indicates that you have not made payment on your outstanding loan/dues for more than 180 days. Whereas, in case you settle the outstanding with an institution for lesser amount than original due, your account appears as settled. For example: You owe Rs1000 to a credit card company and you settle your account by paying Rs800, the credit card company will report your account as settled, reflecting you paid less amount than actually due to them. Since both these statuses can impact your credit score, you need to ensure that there are no write offs and settlement to your loan account.
How to rectify information in CIR?
In case you find that any information in the CIR is inaccurate, you can approach the bureau to rectify the same. You need to identify the error in the report and write to consumerqueries@cibil.com with your query. You further need to contact the concerned institutions against which the error is reflected and inform them about the error. You will be required to provide necessary proofs to substantiate your claim. Once the institution acknowledges the error and rectifies it, Cibil will update the information based on revised data received from the institution.
Financial discipline
Since credit score will determine your future borrowings, it is important to ensure that all the loans taken are timely paid up. Further, one needs to restrict oneself from taking loans for mundane purposes and check his spending habits to have control on credit card dues.Financial discipline will go a long way in ensuring a good credit score.
I have the following queries regarding credit information report (CIR). How can one apply online to get a CIR report? What are the fees to get it, also can we pay it through credit cards? Is there any documentation required?
You can get a CIR by sending a request to Credit Information Bureau of India Limited (Cibil) in writing or you can request for a report online. Log on to the Cibil website and fill up the form. You can also pay the charges online. However, you need to take a print, attach your identification and address proof, so that Cibil can establish your identity. The fee for getting a CIR is `142; the amount can be paid via demand draft also. If you are keen to know your credit score, then the charges are `450. You will get your CIR along with credit score. The report will be sent to you at your address. It will not be sent online for secrecy reasons.
Understanding credit information reports
We are all familiar with the fear and anxiety one feels while applying for a loan. After all, it’s the lender who decides whether we can own our dream home, our first car, or whether our children can pursue higher education.
We are unsure of the lender’s criteria to evaluate our application. Is it the size of our income, the number of assets (fixed deposits and investments), or is it our past performance regarding payments with lenders we have a credit facility with?
While other factors do play a part in the lender’s decision, the credit information report (CIR) plays a pivotal role.
Currently, almost all the lenders access CIRs prior to approving loan applications. Naturally, it’s critical that you get a copy of your CIR and understand it well before applying for a loan.
So, what exactly does your CIR contain?
Consumer information
This section provides the lender with your name, date of birth, gender, an identifying number (such as PAN, Voter ID or Passport Number) and contact details (telephone numbers and addresses). Up to 4 addresses are provided on the CIR. These details indicate who the information — on that CIR — pertains to.
Summary
This provides the lender with an overview of the CIR. It includes the total number of accounts and enquires (up to the last 24 months) on your CIR.
Account(s)
The most important section of your CIR, this section contains the details of your credit facilities.
The Account section contains the name of the lender/s, the type of credit facilities (home loan, auto loan, credit card, etc), the account number/s, whether single or jointly held, when each account
was opened, date of the last payment, loan amount,
current balance and most importantly, a month on month record of up to 3 years of your payments.
Enquiries
This section provides you with details regarding loan applications you have made such as, the name of the lender, date of the application, and the type and size of loan.
The enquiries are captured for a period of 7 years. Simply put, this
section indicates how ‘credit hungry’ you are.
Understanding your credit report, and what it contains
What is a credit information company (CIC)?A CIC collects and maintains records of an individual’s payments pertaining to loans and credit cards. These records are submitted to the CIC by banks and other lenders on a monthly basis.
This information is then used to create a credit information report (CIR) of the particular individual, which is provided to lenders in order to help evaluate and approve loan applications.
CICs are also commonly referred to as “credit bureaus”.
The use of CIRs is best illustrated with an example.
I have a home loan with Bank A and a credit card with Bank B.Both Bank A and B have submitted my personal information and payment details to the credit bureau (in this case, to Cibil).
Recently, I applied for an auto loan to Bank C.
Upon receiving my application, Bank C requested Cibil
for my CIR so that it could assess how I have been paying my current dues and whether I will be able to manage the additional burden of another EMI.
While the bank has requested my Form 16, savings account statements and other identification documents from me, the CIR too will be used in evaluating loan applications.
What information does a CIR contain?
A CIR is a month-on-month record of an individual’s loan-related EMI or credit card payments. Loans can include home loans, credit cards, personal loans, automobile loans and overdraft facilities. Other information included in a CIR is as follows:
l Personal information related to the individual such as name, date of birth, address and identification numbers like PAN, passport, voter number and telephone number
- Account information such as the type of loan taken (home, auto, personal, overdraft, etc), the size of the loan, the current balance outstanding, overdue amount (if any), number of days a payment is overdue (if there is an overdue amount) and so on
- Information on the number of enquiries made by banks on an individual. An enquiry is created on your CIR every time the lender requests the credit bureau for your CIR
No. This is a very common misconception. CICs collect all credit information. This includes information pertaining to individuals who are making their payments on time as well as those who are in default.
No credit history, no credit card- you're in a Catch-22 situation
Ritesh recently passed out of a B-school and joined an upcoming chemical company in Mumbai at a package of Rs4 lakh per annum. He was happy to shift to Mumbai, as his best friend Mayank had already joined a major FMCG firm, listed on stock exchange some days ago in Mumbai. Mayank's package was Rs3.6 lakh per annum. Ritesh joined Mayank in his rented a flat in Mumbai suburbs.
After joining their respective companies, they got busy with their new jobs and eagerly awaited the weekend to catch up.On a leisurely Sunday afternoon, the talks moved towards bank accounts, specifically salary account. Suddenly, they realised their salary accounts were with the same bank, though with different branches.
Three months later, Mayank got a call to check if he would be interested in a credit card from the bank where he held a salary account. He readily agreed and gave all the documents to the bank for getting the credit card. In 15 days, his very first credit card arrived.
Now, Ritesh also thought of getting a credit card for himself. Ritesh applied for a credit card on the website of the same bank and very soon he also got a follow-up call from the bank. He submitted all the documents. Surprisingly, his application was rejected and the bank sent a nicely worded refusal letter. Ritesh was quite surprised, as Mayank had managed to get a credit card, despite having a lower package.
This is a very common problem faced by many first-time employees like Ritesh (with just a few months working experience) when they apply for a credit card and they don't get the same even though they have a decent package.
Let's see why this happens.
Whenever one applies for a credit card (or any kind of loan), the bank or the non-banking financial company (NBFC) gets a report from the credit information company (the biggest of which is Cibil). Cibil is a body, which collects information from various banks and NBFCs across India about the payment history of individuals for the loans or credit card issued to them. The bank refers to this report to find out about the payment track record of a person. As Ritesh was a first-time applicant for any credit, he had no record in the credit bureau to be reported to his bank. Banks don't like to provide unsecured credit (credit card is an unsecured credit line up to the credit limit), where the proposed borrower does not have a repayment history of some sort. This problem, in fact, may persist even if Ritesh had more work experience under his belt.
So, this is a classical chicken and egg situation. You cannot get a credit card because you never had one earlier (and of course you never had one earlier because you could not get one).
So how to overcome this situation?
Well, there is a way out for this issue. First, secured loans are relatively easier to get even without a credit information report. So, if Ritesh applies for a car loan he is likely to get it relatively easier though the down payment requirement may be a little higher and the bank may not provide its best rate to him. He can of course get a home loan, but normally all lenders would require a minimum of 2 years of work experience before a home loan is given. Ritesh can then build a track record on the car loan and get a credit card soon afterwards.
But what happens if Ritesh does not intend to buy a car?
In that case, he needs to build a track record for himself. His best bet is to take a credit card against the security of a fixed deposit with the same bank. These credit cards have a limit of around 80% of the value of the fixed deposit. These credit cards are easily available as they are secured credit cards and in case of any default the banks can use the fixed deposits to recover the credit card dues. Once you have this secured credit card, you should create a track record of paying the bills on time. This will help you create a payment track record with the bank and the bank will report the same to CIBIL and your credit report will slowly build up. Getting an unsecured credit card or an unsecured loan will be relatively easier for you once you have a sufficiently long payment track record of at least 12 months. This will also enable you to break the chicken and egg syndrome.
But let us go back to our friends Ritesh and Mayank. Now how did Mayank get a card, though he too never had a loan or credit card in the past?
Well, there is a specific reason why Mayank got a credit card and Ritesh did not. Generally, each bank has a list of companies, which they categorise in 'A', 'B' and 'C' list, or an uncategorised list.Luckily the FMCG company that Mayank was working with was among the 'A' category company according to the bank and hence the banks are more than willing to provide a credit card to him, despite his lack of experience and prior repayment track record. The bank had prior experience with providing credit to other employees of Mayank's company and it had a good experience and hence was willing to take the risk. Ritesh's company's fell in the uncategorised category, where the bank was not willing to take the risk of providing an unsecured credit card to a person who has no existing repayment history.
The moral of the story is that your employer's status can also help you in breaking the chicken and egg syndrome, without having to go through the slow process of building your repayment track record. But if you cannot break that syndrome, build your credit history gradually.
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