Have you ever approached a bank for loan? Are you planning to approach a bank for loan in the days to come? Please remember whenever you approach a bank for loan, it is essential that you should have a clean history of credit. What do I mean by clean history? If you have availed any loan in the past, the credit payment history must have been done on time and there should be no delinquency.
Banks and Financial institutions run a report on you before granting a loan to you. This report is known as credit information report. In India, credit information report is run on one of the credit bureaus approved by RBI. As of now, India has four credit bureau i.e. 1) CIBIL (Credit Information Bureau of India), 2) Experian, 3) EquiFax and 4) High Mark. Effectively CIBIL is the bureau which is most widely used by banks and financial institutions.
How do banks use your CIBIL report? When you approach a bank for loan, the concerned bank asks you for certain information like PAN card/passport/voter id/ration card/driving licence details, name, date of birth, gender, address and telephone number. Some of the banks may ask for photo copy of your credit card information as well. Using all these information, a bank runs a report on you in the CIBIL system. The report gives a bank history of all the loans availed by you (Reported by various financial institutions from time to time).
The report generated by the bank has a critical component called as CIBIL Transunion score. This score gives an insight into probability of a customer defaulting in days to come i.e. one year. There are three score value generated by CIBIL system 1) -1 (Minus 1), 2) Zero and 3) Score range from 300 to 900.Let us understand what these score values communicate. A credit score of -1 means that a customer has no credit history. This further means that if a customer has no credit background but his details are available in the CIBIL system, the customer gets a score of -1.
How can a customer have details in CIBIL system when a customer has not availed loan? This happens when a bank/financial institution makes an enquiry on the customer. Please note that there are two exceptions to -1 score. If a customer is an authorized user of a credit card, ex. husband giving an ‘Add-On’ card to wife, the customer (Wife) will get a score of minus 1. Also if a customer has credit history older than 24 months, the score will be -1. This means that all the loans availed by the customer have been closed 24 months before the date of reporting of loans.
A customer gets a score of zero, when his credit history is less than six months. In other cases, a customer gets a score between 300 to 900. Please note that higher the score less is the probability of default. Five broad factors decide the score of a customer are 1) Amount overdue and days past due, 2) Credit Utlilisation, 3) Credit Mix, 4) Number of Enquiries and 5) Age of an individual
Every customer should avoid delayed/non payment of his credit facilities. To improve score, the customer should ensure that he pays on time. There is no ideal score but a score better than 800 is considered good by banks and there is high possibility of loans getting sanctioned, of course subject to certain checks at bank's end.
Vivek Sharma is a faculty at Institute of Financial Markets, Vashi. He is CFP, M.A. in Economics, MBA Finance and Fellow in Life Insurance. He can be contacted at email@example.com