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Sunday, August 04, 2013

What is a Credit Score

A Credit Score [including Credit Information Report-CIR], is your detailed credit history and acts as a full evidence of your credit worthiness.

What is Credit Bureau?
Credit Information Bureau (India) Ltd; CIBIL is India’s first Credit Information Company, also commonly referred as a Credit Bureau. They collect and maintain records of individuals and non-individuals (commercial entities) payments pertaining to loans and credit cards. These records are submitted to them by various banks and other lenders on a monthly basis. Using this information a Credit Information Report (CIR) and Credit Score is developed, enabling lenders to evaluate and approve loan applications. A Credit Bureau is licensed by the RBI 
What is a Credit Score?
Your credit score is a three-digit number generated by a mathematical algorithm using information in your credit report. It's designed to predict risk, specifically, the likelihood that you will become seriously delinquent on your credit obligations in the 24 months after scoring.

Why is your Credit Score important?
Your Credit Score plays a critical role in any loan application process. After an applicant fills out the application form and hands it over to the lender, the lender first checks the credit score and credit report of the applicant. If the credit score is low, the lender may not even consider the application further and reject it at that point. If the credit score is high, the lender will then look into the application and consider other details to determine if the applicant is credit-worthy. 
The credit score works as a first impression for the lender, the higher the score, the better are your chances of the loan being reviewed and approved. The decision to lend is solely dependent on the lender and CIBIL does not in any manner decide if the loan/credit card should be sanctioned or not.

How can you maintain a good Credit Score?
You can improve your Credit Score by maintaining a good credit history. This will be viewed favorably by lenders and it can be done with 6 simple rules:
1) Always pay your dues on time. Late payments are viewed negatively by lenders
2) Keep your credit balances low, Always prudent to not use too much credit, control your utilization
3) Maintain a healthy mix of credit. It is better to have a healthy mix of secured (such as home loan, auto loan) and unsecured loans (such as personal loan, credit cards). Too many unsecured loans may be viewed negatively.
4) Apply for new credit in moderation. You don’t want to seem Credit Hungry; apply for new credit cautiously
5) Monitor your co-signed, guaranteed and joint accounts monthly. In co-signed, guaranteed or jointly held accounts, you are held equally liable for missed payments. Your joint holder’s (or the guaranteed individual) negligence could affect your ability to access credit when you need it
6) Review you credit history frequently throughout the year. Purchase your CIR from time to time (may be once in 2 years or so, depending upon your credit usage) to avoid unpleasant surprises in the form of a rejected loan application

Can CIBIL update your Credit records?
CIBIL cannot delete or change records reflecting your CIR on its own; they simply collect records of individuals provided to them by their members (Banks and financial institutions). There are no ‘good’ and ‘bad’ credit or defaulters lists either. So, if you defaulted earlier and now want to make amends, you will have to approach the lending institution, pay your dues, and ask them to send an updated record to the Credit Bureau

What does it mean when your Score is "NA" or "NH"?
A Score of “NA” or “NH” is not a bad thing at all. These mean one of the below:

a) You do not have a credit history or you do not have enough of a credit history to be scored, i.e. you are new to the credit system

b) You do not have any credit activity in the last couple of years

c) You have all add-on credit cards and have no credit exposure

    It is important to note that while these Scores are not viewed negatively by a lender, some lenders’ credit policy prevents them from providing loans to an applicant with Scores of “NA” or “NH” (applicants with no credit track record). Hence, you may have better chances applying for a loan elsewhere.

What does it mean by an Index of 1-5?
This means that the individual has a credit history which is less than 6 months, hence a risk Index is returned. Higher the index, lower the risk

What is a good Credit Score?
Based on your credit history, CIBIL gives you a score between 300 and 900. The higher your score, the greater are your chances of loan approval. all banks check your Credit Score before approving your loan application? 

How can i get my Credit Score?
You can apply for your Credit Score online at http://www.cibil.com/.
You will be asked to fill an Online Credit Score Request Form, pay the application fees (approx Rs. 470/-) and then you can access your Credit Score after authenticating yourself by answering a series of simple questions.

As Credit History becomes more and more important in India, and as loans become an integral part of our lives, it is a good practice to be aware of your current credit score and continuously strive to maintain a good score.


Manoj Arora
Lead a Financially Free Life !!

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