Imagine this. You want to buy a home and you apply for a home loan to a bank where you have your salary account. You have a decent monthly income which is more than enough to service the equated monthly installments on your loan. But still the bank declines your application saying that you are a risky borrower.
How on earth can your lender decide that you are a risky borrower? It may not have been possible for banks earlier to measure the risk associated with a borrower. But it's a thing of the past now.
The Credit Information Bureau of India, CIBIL, in collaboration with TransUnion has announced the development of the CIBIL TransUnion credit score. This generic credit score has a range of 300-900 points. If a borrower has a score of 300 then s/he will be considered as a risky borrower. And a borrower having a credit score of 900 will be considered the safest.
"The product is a generic one and is valid and applicable across all products and for all lenders," said the outgoing Chairman of CIBIL, Mr Santhanakrishnan. The CIBIL TransUnion credit score was launched on November 27 and already members are asking for the credit profile of borrowers," he added.
This generic credit score is developed by taking five parameters into consideration, explains Mr Santhanakrishnan. They are: Credit utilisation, frequent defaults by borrowers, frequent loan enquiries made to a number of financial institutions, and attributes of the trade, like, the age of the credit history and lastly the product mix of your borrowings.
Let us discuss these five parameters. If you have a credit card limit of Rs 20,000 and if you use it all up every month or use most of it every month before paying your dues then it will lead to a low credit score. It sends a signal that you are not a spendthrift.
"You must utilise your credit limit optimally if you want a good credit score," emphasises Mr Santhanakrishnan. If you often default on your home loan or personal loan EMIs or often miss your credit card due date then this also leads to a bad credit score.
Also, if you don't intend to take a loan then you must not often enquire about it. Take care that you don't go to too many banks/housing loan institutions asking for a loan. It creates an impression that you are not a serious borrower. Or your lender believes that you want to avail of loans from various lenders.
The age of your credit history is also considered while determining your credit score. For instance, if you have been using a credit card for the last two years and have never been late on your outstanding then it stands you in good stead. However, if you have been good with your card payment but have missed a few of your home loan EMIs regularly then again it bodes ill for your credit score.
Finally, you should not have borrowed money to buy a home, taken a personal loan to buy a costly gift for your girlfriend or spouse or used your credit card all too often to avoid being termed as a bad borrower.
You may wonder here as to how CIBIL gets this information. Here's how it works.
At the top is CIBIL which collects all the data from various sources including banks, housing finance companies, non-banking finance companies and other lenders where you apply for a loan or make enquiries for a number of financial products. The data is then collated based on the five parameters discussed above and later disseminated to members based on their enquiries online.
"There's a rule, however, which states that banks or CIBIL members cannot access the CIBIL database unless they have a customer who has applied for a loan and this data can't be used by members for marketing the data to corporates," avers Mr Santhanakrishnan allaying fears of data misuse.
The law stipulates that if there is leakage of data from banks for commercial purposes other than assessing a borrower's credit rating then the guilty party can face punitive actions like a hefty fine or suspension of their license. "The Reserve Bank of India, the banking regulator, takes a final decision in such matters, if ever such an incident comes to light," informs Mr Santhanakrishnan.
RBI, says he, was instrumental in the formation of CIBIL. "As the number of retail borrowers increased it necessitated pooling off of information in the form of a centralised database. RBI did not want to have 'information asymmetry' in the market," he says.
Here are some tips from Mr Santhanakrishnan to all borrowers to improve their credit scores:
~ Be optimal with your credit utilisation. Use only as much credit as you need. Don't buy that LCD on impulse. Use your credit very meaningfully. Please distinguish between your needs and wants.
~ Pay your bills, EMIs in time. Don't ever be late on your credit card dues. Always try to pay them in the full to have a good credit score.
~ Enquire for credit (home loan, personal loan etc) only if you are in serious need of money. Be sure that if you go with an enquiry and if sanctioned a loan you are going to utilise the same. If you do it regularly then it creates a bad impression on your lender about your credit profile. Take loans that are in proportion to your income. Don't ever over leverage yourself.
