A Reserve Bank of India (RBI) committee recently submitted in a report that in due course, every individual should receive a free copy of her credit report from credit bureaus. It is noteworthy that awareness about credit reports and scores in India is low.
Low awareness, however, does not make having a healthy credit score any less important. Take the case of this 29-year-old Bangalore-based information technology (IT) professional who requested anonymity. Back in 2007, when even fewer people knew about credit scores and only one out of the present four credit bureaus was in operation, he took an add-on credit card for his father who was going abroad for a trip. His father made some purchases abroad using the card. But soon after returning to India, his business hit a low and he was unable to repay the outstanding amount. Between 2007 and 2010, the accrued dues inflated to Rs 43,000. In 2010, they received a call from the credit card issuing company that they could settle the account by paying Rs 28,000. This was good news for them and they paid up. "The lender, however, did not tell me about the side effects," said the IT professional. In 2012, when he applied for a personal loan for his wedding, his request was declined as there was a "settlement" flag in his report.
He approached the credit card issuer again and after many calls and emails, the lender agreed to remove the flag provided an additional Rs 43,000 was paid. The lender accounted for the interest unpaid between 2010 and 2012. Though the flag has been removed after the fresh payment was made (i.e. a total payment of Rs 71,000), in the number of "days past dues" column of his credit report, the months for which he did not pay are still mentioned.
Everyone needs to keep an eye on their credit score, irrespective of which category you fall in — have defaulted and have a bad score; have never defaulted but have an average score; or have a good score and want to maintain it. Avoid letting negative remarks creep into your credit score.
Here are some of the flags in a credit report that can dent your chances of getting a loan.
Written off: This flag enters a credit report if a loan is unpaid and has been ultimately written off by the lender. "This is the worst remark one can get, because it means that the lender was not able to recover the loan and had to incur 100% loss and has ‘written off' the loss in his accounts," said Manish Chauhan, founder of www.jagoinvestor.com.
This flag essentially shows that the person is financially unstable and entails high risk. Lenders will be reluctant to give loans to such customers.
Settlement: This flag appeared in the credit score records of the IT professional mentioned earlier. It essentially means that the borrower was not able to pay for a long time and the lender had to finally recover as much as it could and close the loan.
Though the borrower gets relief initially by paying less than what is actually due, such a comment creates problems during future loan requirements as the borrower is deemed risky.
Enquiries: "Many loan enquiries by someone will be seen as a negative by lenders," said Chauhan. Many loan enquiries in a short period of time indicates that a person is "credit hungry" and lenders are not comfortable with this. It is advisable to keep a reasonable gap between loan enquiries, ideally of six months or even more.
Other comments: There are some other comments that could also dent the chances of availing a loan. For instance, "days past dues". This information is carried for the past 36 months.
Apart from this, if cheques issued by the borrower have bounced, or most of the credit limit on a credit card is used on a regular basis, these will also affect a report.
Improving score sheet
Once a score has gone bad, it can improve, but over a period of time. Unfortunately, the process is long drawn and tedious. This is where some of the credit advisory companies may be of help. These companies guide customers in improving their scores. You can make full payments and then ask for the relevant documents from the lenders. These documents basically show credit bureaus what information should be updated and which flags should be removed.
However, remember that these companies cannot remove or edit any information in the credit information report directly. They can only give suggestions to customers and credit bureaus can only make changes if financial institutions inform them.
A good score actually helps save money as it lets a customer avail a loan at the best possible rate of interest available. For example, you may be refused a loan of, say, Rs 1 crore, by a bank offering an interest rate of 10.50% because your credit score was not good. Instead, a housing finance company with less strict criteria may give you the loan, but the interest rate would be higher, say, 12.50%. Eventually, you will be repaying roughly Rs 33 lakh more on the loan over 20 years.
It's said that "a penny saved is a penny earned". With credit scores, we could say "a penny repaid is a penny earned."