Responsible Borrowing

What does "Credit Score" mean?

A credit score determines the credit history of an individual. It is a numerical Score that summarizes credit history and credit risk for lenders. On application of any kind of a loan, be it credit card or a home loan, the bank or lender will check your credit report and credit score to understand your Credit history and decide if they should grant you a loan

There are four credit bureaus in India that track millions of customers and their credit status:

• Credit Information Bureau India Limited (CIBIL)- The oldest bureau in India that publishes the most widely used credit score (CIBIL TRANSUNION Score) and credit report.
• Experian
• Equifax
• High Mark

At IIFL Home Finance Limited we refer to CIBIL scores to evaluate an individual's credit report and history.

Who can have a credit score?

If you have a credit card or have ever availed a loan, be it personal, auto, education, home or if you have bought products on EMI, you should have a credit history and a credit score.

What is a CIBIL Tans Union Credit score?

Generally known as CIBIL score, it is a 3 digit number based on a snapshot of your credit report that helps a lender determine your ability to pay back debt (your score = your credit risk). This score ranges from 300 (worst) to 900 (best). This score plays an instrumental role in loan approval. The closer your score is to 900, the better are the chances for your loan approval.

What are the contents of a Credit report?

Credit report contains four important areas of information.

• Personal: Name, Address, PAN no, Date of Birth and employment information
• Credit History: Types of accounts, the date you have opened the account, your credit limit, the account balance, payment history
• Public Records: Foreclosures, Garnishments, Legal Suits and judgements
• Enquiries: List of creditors that have accessed your credit report in the past.

What attributes Credit Score?

The most widely used credit score is the CIBIL score it is based on the following factors:

• Payment History: Considers late payments and bankruptcies. These defaults can mar your credit score.
• Amounts Owed: Takes into account your debt and available credit lines. The more you owe compared to your credit limit, the lower your score will be.
• Age of Credit History: Provides tenure of your credit accounts and frequency of your usage. A longer credit history will usually increase your CIBIL score.
• New credit: Incorporates new credit accounts you opened and new credit requests (such as credit cards). Multiple credit requests represent greater credit risk.
• Types of credit used: Considers how many credit accounts and how many installment-type accounts you have. A diverse credit portfolio can strengthen your report.

What is the advantage of of having a Credit score and report?

The benefits of credit score and credit history holds several benefits to you as a consumer

• Loan Approval process gets accelerated as the credit scores are readily available to the banks and lenders. Loan Approval process that used to take weeks together can now be approved in a couple of days for a person with good credit score and credit history.
• Wide Array of options open up to qualify for the best loan and rate in the market if you have a good score.
• Loan/credit approval decisions are made on concrete terms rather than looking at your city, gender, religion, family background etc., lenders can focus on your personal credit report to decide about your loan application.

Who all can view my Credit Report?

Either you or the financial institutions that you authorize (usually when you sign an application) for credit processing can view your credit report. However in some cases, some banks check your report prior to giving you a pre-approved loan or credit offer.

What is the frequency in which I should check my Credit score?

You should check your credit score for the below two main reasons.

First, By scrutinizing your report you will get an idea about your current credit status and further corrective steps can be taken to make the score better.

Second, Any kinds of issues can be identified from the report such as wrong information, fraudulent activities such as accounts that you may not have opened etc. You can dispute any wrong information in your report with the bureau and get it corrected to improve your score. It is recommended that you access your CIBIL score annually to keep a track of your credit score movement. Moreover, if you are trying to improve your credit score before a big loan application, it may make sense to start tracking it on a quarterly basis.

Does my Credit Score solely determine the lenders decision?

No. The lender’s loan underwriting policies and your credit score collectively determine whether you get a grant for a credit card or loan. For example, a credit score of 750 may be good enough for one financial institution to issue a loan, provided you meet their other requirements. On the other hand, another service provider (who may be more risk averse) may not issue a loan to you unless you have a score of 800+.
If more than 50% of your net income is utilized to pay off existing loans and EMIs, you may not get a loan approved even if you have a very good score, as the additional burden of debt on you may mean your inability to pay loans on time. In other words, your Debt Servicing Ratio (Monthly Loan and EMIs payment / Monthly Net Income) should be less than 50% for you to be approved for a new loan. Credit score and credit report nevertheless plays an instrumental role in any credit decision by lenders.

Which factors in my credit report are essential for my loan approval?

CREDIT Scores and reports have been extensively used by loan providers to evaluate loan applications for over 5 years. However, it is only recently that people have begun to realize the importance of maintaining a good credit history. Understanding the CIBIL credit report helps you increase the chances of your loan approval.

Enlisted below are essential parameters pondered by a Lender while evaluating your credit application.

This is available in the Account(s) section of your CIBIL credit report. There are 2 aspects to it: Days Past Due (DPD), and the month and year of payment. The DPD indicates how many days the payment is late that month. Anything other than "000" is considered negative by a Loan provider. Up to 36 months payment history (with the most recent month displayed first) are provided in this section.

This too features in the Accounts section, it considers the current balances on various loans, indicating the depth of your debt. The summation of your current balances to Loan providers, determines your potential to undertake additional EMIs, in relation to your current income. Lower the current balance, the better is the chance of your loan getting approved.

It provides latest sanctioned number of credit facilities if a loan provider observes that you have recently been sanctioned a number of new credit facilities; it would mean that your monthly outflow in terms of EMIs has increased. Hence, it may have a negative impact on your loan application.

It indicates the number of loan applications that you have applied for the more the number of applications in the recent past the more the number of enquiries, the chances of your loan getting approved are likely to suffer. Simply because, this credit behaviour indicates that you are “Credit Hungry” and in an urgent need of money. It is likely to make Loan providers more cautious while evaluating your credit application.

It is imperative to check your CIBIL credit report 2-3 times each year to ensure that your 'Reputational Collateral' is reflected accurately, if you plan to avil of a credit facility in near future.

• Repayment Track Record
• Current Balances
• New Credit Facilities
• Number of new Enquiries

What is the importance of Enquiries?

On each application of a loan or a credit card a check is made on your cibil history. This action is called as an enquiry and it is recorded in your credit history. Too many enquiries within a short period may have a negative impact on your score and credit history. Lenders may assume you are trying to get as much credit as possible and may identify it as if your spending is out of control. (though it may not be the case) Rest assured, when you request a copy of your credit report (which is recommended periodically) it may not negatively affect your score.

What impact does a home loan have on my Credit score and report?

The impact can be either depending on your loan repayment habit. If you have taken a home loan and are making timely payments of the EMIs, it will help you in building good credit history and in turn a good CIBIL score. However, if you are late in paying the EMI and/or have defaulted, it will have a negative impact on your CIBIL score and history. Therefore, if for some reasons you are unable to pay your home loan, please work with your lender to get an extension on the loan or change of terms of the loan. It’s imperative that you are in good standing on your home loan, as it will impact your prospects of future loans.

What happens if I don’t pay on a timely basis?

Your entire loan repayment transactions and history are being reported to the credit bureau by the loan provider. Therefore, if you are not making timely payments, it will reflect in your credit report and negatively impact your CIBIL credit score. If you default on any of your secured or unsecured loans, it may reduce the possibility of you getting a loan in future. So please ensure that you pay all your bills on time. If you are not able to meet your EMI obligations, please work with the lender to make some alternative arrangements, if possible.

Does poor Credit History of Your Close Relatives/ Parents Affect You?

It may. If you are financially dependent on your parents/relatives or they are acting as guarantors of your loans, any negative credit history pertaining to them may reduce your chance of getting a loan.

Does my credit report / score impact a Job interview?

The answer is 'Yes'. Several companies from Finance, IT and other sectors have started to check the candidate's credit score and credit report as part of the background check process. This phenomenon is more common at senior level hiring. Quite a few companies (mostly multinationals) will run a worldwide credit check (e.g. USA, Canada’s FICO) on you. If your credit report or credit score show major issues in terms of your debt repayment history, you may not be selected for the job you have applied for. If the employer is not able to access your report directly, they will ask you to submit this report along with rest of the documents required by the company.

What are the ways by which I can establish a good Credit history?

Credit Score and history are the next most important tools apart from your income to evaluate your application for any loan or credit card application. It is therefore important that you understand your Credit Information Report (CREDIT REPORT. A Good Credit Report can be maintained by following the below rules:

• Payments should always be on time. EMI/Cheque bounces are considered as negative habit by loan providers and may affect the chances of your loan getting approved.
• Low balances should be maintained. Credit Card utilization should be less, if used near to the limit it should immediately be paid off For example, if you have used Rs. 90,000 out of a credit limit of Rs. 1,00,000, this may be viewed negatively by a loan provider. It's always prudent to not use too much credit.
• Credit availed should be varied. Your credit history should contain a mix of a home loan, auto loan and a couple of credit cards. Although a credit card offers easy access to finance, it’s also by far the most expensive form of credit. The more the number of credit cards with high utilization, the larger are the payments resulting from its high rate of interest.
• Application for new credit should be in moderation. If you have made many applications for loans, or have recently been sanctioned new credit facilities, a Loan provider is likely to view your application with caution.
• Think again if you plan to close Credit Card Account. While, using credit cards may negatively impact your credit history, unused credit cards actually imply that you are financially secure. This makes Loan providers view your application more favourably.
• Be cautious if you are a joint account holder or a co-signer. In a co-signed or jointly held account, you are held equally responsible for missed payments. This is extremely important because your joint holder’s negligence could affect your ability to access credit when you need it.
• Assess your credit history frequently throughout the year. Unpleasant surprises in the form of rejected loan applications can be avoided by ensuring that your report accurately reflects your current financial status. So reviewing your credit history 3-4 times each year is imperative.