How banks decide to give you a loan or not

For years, banks have had to fall back on their own experience to gauge consumer's credit worthiness. However, in the last few years, things have started to change for the better.

Lenders now are armed with your credit report provided by Cibil (Credit Information Bureau India Limited) that has all the pertinent details of your credit pattern (loans and credit cards). More importantly, since this data is collated from across the country, whether you have defaulted in Mangalore or in Mumbai, you are still on the radar.

And when you apply for a loan or a credit card, lenders call for a copy of credit report from Cibil before considering your case. This report has a credit score that is arrived at by analysing your repayment record, outstanding debt, credit enquiries, amount of credit limit utilised and various other parameters.

Though prima facie, two individual cases may look similar, their credit scores may differ owing to other factors like age, income, number of dependents and other factors. In short, this credit report contains the complete snapshot of your credit history.

This is an important tool at the hands of the lenders because it is a known fact that risk perceptions change for different borrowers.  And this is determined by borrower's credit history.

This is a significant change because now banks need not depend on their own experiences to assess the credit worthiness of the borrowers. What it just needs to do is track your past record from Cibil. Also, it would help banks to be in a position where they can distinguish between the qualities of customers. Till now, they were offering same interest rates. Now they can offer customers, with a good credit history, incentives to bank with them.

Further, a good credit score puts you on the higher pedestal before any lender, you may be offered softer rates.

This system is quite prevalent abroad, where banks and financial institutions have access to a database that contains the following:

List of credit cards

• Typically, Cibil collates data on credit worthiness of all borrowers provided by member banks, financial institutions and credit card issuing agencies. Based on this, it prepares the Customer Information Report and then assigns a score to it which enables lenders make objective decisions.

It is therefore important that you do not spoil your credit score by making late or missing payments or having too many outstanding loans or even loan requests as your credit score is an indication of your financial health.

Payment history of credit cards and other loans

Regular payment history of rents and other utility bills

Savings accounts history, including bounced cheques

Total outstanding debts

Available credit on the cards

Further, if you feel that the credit score is not correct or unfair, then you can first approach the bank that has reported you to the Cibil. Also, you can complaint to Cibil directly to rectify the situation.

The writer works with www. apnaloan.com