Importance of Credit Information Reports

Abstract of the Article: The Credit Information report has become a necessary document for Banks and Financing Institutions as it provides an insight about a prospective borrower and accordingly it helps in taking credit decision. An Excellent Credit Score can help in many ways to an individual. Most of the Banks in India generally consider CIBIL score of 700 and above as a good credit score.  Credit Score more than 750 may be considered as an ideal score as it provides you power to negotiate good terms on your loan while score below 650 would attract a higher interest rate. A strong credit report that will enable you and your spouse to get the credit you want while a poor credit report may affect a wonderful moment in life.

Credit Information Bureau (India) Limited (CIBIL), now known as TransUnion CIBIL Limited, is India’s first Credit Information Company (CIC) founded in the year 2000 with the concept of credit information sharing in India.

In January 2015, the Reserve Bank of India has mandated that all Credit Institutions (CIs) in the country shall become members of the undernoted Credit Information Companies (CICs) and submit data to them at a stipulated periodicity.

The Reserve Bank of India has accorded license to following four credit rating bureaus:

• TransUnion CIBIL Limited
• CRIF High Mark Credit Information Services Pvt. Ltd.
• Equifax Credit Information Services Pvt. Ltd. (ECISPL)
• Experian Credit Information Company of India Ltd. (ECICIPL)

The CICs and CIs shall keep the credit information collected/maintained by them, update regularly on a monthly basis or at such shorter intervals as may be mutually agreed upon between the CI and the CIC.

Consumers Credit Information Report

Consumer Credit Information Report (CCIR) & Company Credit Report (CCR) are basically two types of CIR which are meant for Individual and Company respectively.

A Consumers Credit Information Report (CCIR) contains detailed information on the credit you have availed, such as home loans, credit cards, personal loans, automobile loans, overdraft facilities.

• Credit Information Report (CIR) prepared based on the vast information database pertaining to individual borrowers.
• CIR is a vital tool used by credit grantors like Banks, Fis etc at the time of new customer acquisitions as well as granting of additional loans .
• CIRs provide factual information on credit histories of borrowers enabling the financing institutions to make objective lending decisions
• With CIR, credit grantors are better equipped to identify risk areas, disburse credit faster and with greater efficiency and grow business profitably.

Company Credit Report (CCR) is a record of Company’s Credit History. This record is created from the data submitted to Credit Information Companies (CICs) by all the lending institutions across the country. It is not a credit rating. It provides the information about  past payment behavior of the company

Credit Information Report (CIR) contains following Information of an individual:

• Personal information & KYC details
• Employment details
• Score with classification of risk
• Summary of loan accounts & enquiries
• Status of loan accounts
• Individual loan account details
• Nature of repayment
• Overdue, if any

Importance of Credit Score

Credit Score is important for an individual as well as for Banks or any financing/lending institutions. In India, Credit Score is commonly referred as CIBIL Score.

Presently, CIBIL Score is India’s most trusted credit score model. It is extremely important for lending institutions to know which customer is likely to manage his loans responsibly. CIBIL studies the borrower’s loans and repayment patterns and predicts whether he/she is likely to default in the near future. This minimizes risks for the financial bodies and increases their profitability.

Credit Score is a numeric summary of credit history. Credit Score indicates the “Probability of Default” of a borrower based on their credit history. The value Credit Score/ CIBIL Score ranges between 300 & 900. This score is derived by using details found in Accounts and Enquiry section of Credit Information Report.

Score predicts the likelihood of 91+ days delinquency on one or more loans in the next twelve months. The higher the numerical value of the score, lower is the risk profile of the individual. Individuals who do not have any loan record in CIBIL database are assigned a default score of-1.

Most of the Banks in India generally consider CIBIL score of 700 and above as a good credit score.  Credit Score more than 750 may be considered as an ideal score as it provides you power to negotiate good terms on your loan while score below 650 would attract a higher interest rate. Banks will take a position not to negotiate or not to reduce the interest rate.

Benefit of Higher Credit (CIBIL) Score to Individuals:

• A high score in the credit information report signifies higher credit worthiness of the customer
• Higher the CIBIL score more will be the chances of future loan approval.
• Pre-approved loans and credit cards facilities may be offered by leading lenders.
• A good CIBIL score allows you to negotiate a competitive rate.
• A good credit report can get a loan approved faster.
• A credit score of more than 750 is typically considered to be a good score and is most likely to be eligible for sanction of a loan.

A strong credit report that will enable you and your spouse to get the credit you want while a poor credit report may affect married life and a wonderful moment in life.

A bad credit score could potentially mean higher insurance premiums, rejection from a landlord to rent a house or even losing the job you wanted.

Benefit of Credit Report to Banks & Lending Institutions

CIR helps financing institutions in following ways:

• To check the credit history and track record of loans taken and repayment done by a customer
• To assess the customer’s capacity to service the loan
• To obviate chances of multiple financing
• To cross check important personal details furnished by the customer in the loan application
• Score predicts the likelihood of delinquency on one or more loans in the next 12 months.
• The higher the numeral value of the score, lower is the risk profile of the individual.
• It helps the Credit Decision making officials in predicting the future financial behaviour of the prospective borrower

Reasons why your credit score drops

There are many reasons of dropping of a person’s credit score. Some of the main reasons are as under:

1. Late Re-payments:Late payment of EMIs of loans or Payment of Credit Card Bills after the due date affects the credit score of a person and it reduces the credit score significantly.
2. Higher Credit Limit utilization: Higher or Maximum utilization of Credit Limit of Credit Card is seen as sign of credit hungry and mismanagement. This may also lead to lower credit score.
3. Factual error in credit report:If there are any factual errors in your credit report, the mapping of data may not happen. This may also result in wrong credit score.
4. Frequent Change of Credit Cards: Good Credit Score is build-up on long credit history. Once a credit card is closed the history will be removed from your credit report after some time. Due to the thrashing of the accounts there is a probability of dropping of your credit score.
5. Frequent Enquiry of Credit Score: Whenever any person applies for credit card or a loan, the lender fetches the Credit Score of the applicant to make credit decision. Every time, there will be a slight drop in the score on account of enquiry for lending purposes by Banks and Financial Institutions. If you apply for credit with multiple lenders they will all enquire your credit report and accordingly there will be drop-in credit score.

Ways to improve Credit Score:

There are many ways to improve credit score of an individual. If your credit score is below the excellent credit range then it can be improved by making a few changes in your credit handling ways. There are a few common habits that will help you in improving your credit score. Some of the following are a few tips for improving the credit score:

1. Pay all Your loan repayment (EMIs) and credit Card bills well in time without fail
2. Avoid taking multiple Credit Cards, apply for new credit cards only if it is required and that you can manage smoothly
3. Do not overuse the available credit limit, use only upto 30% to 40% of credit card limit
4. Keep long and stable credit histories as it helps in increasing your credit score
5. Check credit report and credit score regularly and if you find an error, take step to get it rectify mistakes of Credit Report at earliest.
6. Get score building loans like Home Loan, Mortgage Loan or secured loans etc.

Rectification of Credit Score or Credit Report

The RBI has asked all Credit Information Bureaus to make available credit score for individuals for free once a year. If you find any discrepancy in any of the fields of the report or your score could vary, a dispute can be raised online using the online dispute form or by writing to CIBIL.

Sometime, there may be mis-reporting of the fact by lending institutions due to any technical or other issues which may affect the Credit Score of an individual. It is in the interest of the individuals to get their credit score rectified in time. The Credit Information Companies have made the process of reporting and rectifying the CIR in case of mis-reporting of the facts. Step-by-Step process is given on the websites of CICs and online dispute form may be sent through e-mail to CICs. Total dispute resolution time fixed for it is 30 days.

Conclusion

It is needless to say that an excellent Credit Score can help in many ways to an individual. The Credit Information report has become a necessary document for Banks and Financing Institutions as it provides an insight about a prospective borrower and accordingly it helps in taking credit decision.

It is in the interest of a person to become financially disciplined and manage pay all his/her financial obligations in time so that credit score is always maintained in good shape.

Authored By:

Sunil Kumar
Chief Manager (Research)
State Bank Institute of Consumer Banking
Hyderabad