How CIBIL keeps an eye on your credit card usage

You may forget about your mistakes but CIBIL keeps an eye and maintains a record of each and every transaction right from your first credit card!

With digitisation of almost all aspects of financial and banking industry, it is difficult to keep anything under wraps. Be it cash transactions, tax issues or your credit history all can be traced and tracked. With digitisation nothing can be forgotten. You can forget an old credit card but your CIBIL report does not; banks and credit card agencies share all data related to delayed and missed payment with credit rating agencies so do remember your financial digital footprint will follow you.

How credit rating works?

Till about fifteen years back, banks lent to customers or issued cards based on their own policies and perceptions. There was no agency or mechanism that allowed banks to objectively assess the risk potential of a customer. With setting up of CIBIL and other credit agencies this changed slowly; however now it is an accepted norm to lend after assessing the credit score of an individual.

Credit score is calculated after collecting data from all lending agencies and analysing it. The factors that go into making the CIBIL score of an individual are: the payment history, credit utilisation, credit score inquiries, credit mix and how deep is the credit history.

CIBIL Score is all about history!

Preeti was surprised when her auto loan was rejected due to a poor credit score. Since this was her first loan application she was in a fix that how could she have defaulted? On checking her detailed credit report she was dismayed to find that the cause of trouble was a credit card she had owned in her student days.

She has changed her address; she had neither surrendered the card nor applied for change of address. She had completely forgotten about this card and its existence... but not her credit card company.

CIBIL rating is based on the principal that your past treatment of debt is an indicator of how you are likely to behave in the future. While often there might be genuine issues that have led to a default or delay, there is no way these subjective factors are reflected in the CIBIL score. A credit history of at least 6 month or more is required for a CIBIL score.

Though each single lapse whether it's missed payments or high credit ratio or foreclosing a loan contribute to the final CIBIL score it is important to remember that a lot of parameters over a long period of time are considered.

If by and large one is careful with his/her debt one or more lapses will just be a blip and will not cause any major negative impact on the CIBIL score. Since a credit score is calculated using a combination of various factors, just being prudent about one aspect and ignoring others can also have a negative bearing on the CIBIL score.

Harsha had always been careful about paying his credit card bills on time. So when his personal loan was denied due to a low CIBIL score he went through his CIBIL report in detail. His credit utilisation had been high especially in the early days of his career. Though he always paid on time his credit card bill was an average of Rs 35,000 to Rs 40,000 for a sanctioned credit limit of Rs 60,000.

Credit utilisation is a ratio that measures the credit card usage vis-a-vis the sanctioned credit limit. It is calculated per card and overall also in case of more than one card. Not only should it be low overall but for each card also it should be low. Despite you always paying on time high credit utilisation reflects credit hungry behaviour.

When it concerns a credit card remember paying on time, keeping a low credit utilisation ratio and surrendering cards that are not required or used are the basic requirements if one wants a healthy credit score. Also do keep in mind small regular transactions with timely payments are the simplest way to get a credit trail and a good CIBIL score.

Being careful with credit card usage right from day one is important. In your early years of financial independence you might go overboard due to lack of knowledge, newly found financial freedom, peer pressure or simply because you are careless. These small avoidable mistakes continue to follow you for a long time and can dampen your chances of getting future credit. You may forget about your mistakes but CIBIL keeps an eye and maintains a record of each and every transaction right from your first credit card!

Photograph: Anonymous9000/Creative Commons

Note: The lead photograph is used only for representational purpose

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.