The CIBIL score which is colloquial synonym for Credit Score is an expression of one’s credit health. The three digit expression denotes the chances of person defaulting over 24 months of initial loan term.These scores are used by underwriters to decide on the fate of a loan request.
In India, the credit score ranges from 300 to 900 with 900 being the best. As of now over 40 crore people in India have a credit risk score.
Despite CIBIL (first credit bureau in India) having a presence for over 10 years now, several misconceptions surrounding the CIBIL score continue to exist. Some of these are a result of an acute lack of awareness while others, ironically, are carefully cultivated myths based on a limited understanding of the subject.
A few common misconceptions and the facts are given below:
1. My credit score will drop if I check it
While the inquiries initiated by multiple lenders in a specific period of time will have a bearing on the credit score, checking your own score will have no impact on it. In fact, one can pull out his credit report as frequently as every day, if he desires, without worrying about his credit scores.
2. My credit score gets impacted by my place of living
Credit score is reflection of one’s performance on credit. There are multiple factors that impact the credit scores but all these are pertaining to loans or any other credit facilities taken by the individual. The demographic factors including place of living, type of accommodation, size of property etc. do not play any role in credit scoring models
3. Being a co-borrower has no impact on my credit score
One needs to be very clear when signing up as a co-borrower. Even in case of second or third co-applicant, the liability to pay rests with all the borrowers. In the event of default, the credit score for all co-borrowers get impacted.
4. As the guarantor of a loan, I do not need to worry about the repayment of the loan and its impact on my credit score
A guarantor basically signs off the risk exposure on the primary borrower. It means that in case of default by the primary borrower, the guarantor stands guarantee to pay the dues.
In such a scenario, the guarantor does not need to worry till the time the loan is being repaid promptly. However, in the event of default, it becomes his liability to repay the loan. Failure to do so will have similar impact guarantor’s credit score as would be in case of default on the loan taken by him in his own name.
5. Paying in cash for my purchases (rather than using my credit card) will help me build my credit score
A cash transaction does not have any impact on your credit score. On the contrary, if you use a credit card to buy a product or service it may have a positive impact on your credit score (provided you pay back in time on this card and other accounts as well)
6. Utility bills payments have a bearing on my credit score
While the utility bill payments do impact the credit scores (positively or negatively depending upon the repayment patterns); in India, utility bills do not have any bearing on the credit score as yet. Even so, it is advisable to pay all your bills in time since it shall not be long when these services’ payments shall start impacting the credit scores.
7. My credit score will be excellent if I do not have any credit cards or loans
Credit scores is expression of one’s credit behaviour over a period of time. The data available with credit bureaus is taken into account to predict how one is going to behave on new credit facility and chances of him defaulting over a period of time. Not having any credit accounts would directly indicate that the person does not have any exposure to credit and predicting how he would perform on a new credit facility in future shall not be possible.
In the absence of an active loan or credit card, the credit scores are bound to be low and this can negatively impact the approval of a loan request.
8. The negative accounts on my CIBIL report purge after 7 years and have no impact on my credit score
In evolved economies where the credit bureaus have been present for decades, the delinquent accounts do get purged after a stipulated time frame (normally 7 years). In developed economies there are specific government policies around credit scores. However, that is not the case in Indian context. A loan or credit facility with missed payments is likely to continue to reflect on the bureau report and impact your credit score (irrespective of how long ago they have been closed).
Conclusion
Credit scores carry high importance in financial wellbeing of any individual. Similar to physical wellness, where the misconceptions and erroneous understanding can lead to serious repercussions, the myths and mistaken beliefs can also lead to acute situations impacting financial health of an individual. Therefore it becomes apply important to be cognizant of the correct information and lead a healthy credit and financial life.
This article on CIBIL scores- Common Myths and Misconceptions is a guest post, written by Mr Arun Ramamurthy, who is the co-founder of Credit Sudhaar, a company which aims to spread awareness about importance of credit health and help people improve credit score . He co-authored the book ‘Unlock the Power of your Credit Score’.
Manikaran Singal is the founder and Chief financial planner at Good Moneying Financial Solutions. He is a CERTIFIED FINANCIAL PLANNER CM and SEBI registered Investment adviser (Regd no. INA 100001620). He’s having 20+ years of experience in financial services space.
It is absolutely bizarre that a person who has not used any ‘credit’ facility in the past, does not have a credit score. Is it not a western concept where you are forced to take ‘credit’. If a person pay by cash or cheque, her credit score is low. Is it not a ploy by all the credit offering companies to tempt you to take ‘credit’ from them so that you can be ‘assessed’ for your credit score.
It sounds extremely funny and beyond any logic. It is like this that my ‘good character’ will be assessed only if I have certain cases against me – may be of traffic challans, or some petty offences. If I do not have any offence against me, my ‘character’ cannot be assessed.
Dear Kamal
Till about 2008, the Credit Bureaus were not very effective used in India and as you may be aware that due to the 2008 melt down, the lenders had had to face very high delinquencies and run losses. This led to Credit Bureaus becoming more powerful in India. While it is a western concept, it is now gaining relevance in Indian market as well.
The fact is that the banks and lending institutions are in the business of extending loans and any delay on repayment on non-payment of outstanding amount results in loss on that particular account. To be able to address this, the banks check the past history on repayment for prospective borrower. In case of any delay or non payment of dues, the underwriting decision goes against the borrowing request.
Also, please take a note that, the underwriting decision is based on multiple factors and the Credit Bureau data is one amongst them (though an important one). It is not that the first timers do not get a credit facility. There are scores of Indians joining the financial main stream every month and would need credit facility. Banks and lenders do extend loans and credit facilities to these individuals.
For a greater clarity you may want to read the book “Unlock the Power of your Credit Score”.
I want to know that how do I check my score? I searched and found that one has to make a payment of 400 odd bucks to first buy credit score and then some other details on CIBIL site.
Is there no other way to check? And secondly since I’ve never done it so does that mean that I don’t have a credit score?
Dear Gurkirat
You may visit any of the four Credit Bureaus in India to check your credit score. Following are the bureaus:
CIBIL (Report costs Rs 500)
Equifax (Report costs Rs 400)
Experian (Report costs Rs 400)
Crif Highmark (Report costs Rs 300)
Alternately you can also get to know your score for free from website http://www.freescoreindia.com
The score is an outcome of your credit activities and is reflective of your credit health. Till recent past, the score would have got generated only if you have had taken loan or any other credit facilities, but in recent past the credit bureaus have developed a model to give score based on various other parameters even if the individual has not had any exposure to credit so far.
That’s exactly what I mean. Despite not having taken any loan/credit facility earlier, when I needed it recently, no body asked me about my CIBIL score. In fact, more than one lender was willing to extend me loan and that too at the most competitive rate. I point blankly told them that I have not availed any credit facility earlier, this is my credentials and do you want to extend a loan/credit facility. Simple. Every body agreed and even issued me a Loan Approval Letter also immediately.
Kamal, Credit score is one of the parameters to check out the loan eligibility and not the only one. You are Right, if you have never availed any credit facility before and due to which does not have any or good credit score, this does not mean that your loan application would get rejected.
Moreover in many cases if you have good relations with bank and have decent transactions and account average balance at place, then upto a specific amount your credit score can also be ignored by bank to grant you loan.
Thanks for sharing your experience.
Hello Sir,
First of all i really want to thank you, somewhere randomly reading your posts and then seeking your advise has sorted my basic financial planning. I now have certain queries with regards to my cibil. I have a score of 702, and in my report i have 3 confusions:
1st- total 4 savings account are reflecting, whereas i hold only 2. Is there a way to find out how many sb acs we hold?
2nd- i once had a credit card for 9-10 months. Ive made all payments diligently and closed the card as i wasnt using it. However there is a -2 amt reflecting. Im confused if its an outstanding amount or overpaid amount.
3rd- there is one auto loan enquiry reflecting for rs.1, 6 yrs back, which ive never done. Where will i get these details.
Require you guidence, kindly advise me.
Hello Sir,
Kindly revert.
Hi Aditi,
I went through your queries and would like to address one by one :
– Savings account : First and foremost credit report only shows credit card and loan accounts. Your current and saving bank accounts are not part of this report. So I am confused which report you have.
– Credit card : -2 amount is an excess amount paid by you. Do not worry your account stands closed. The bank owes you Rs.2/ as you made an extra payment.
– Auto Loan enquiry : You will need to raise a dispute with the respective bank and the bureau for this as they will be in a better position to handle.
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I would advise you to appoint a credit counselor who can help your resolve all the above three queries on the call or via email. To know how credit counselling can help you visithttp://blog.creditsudhaar.com/2015/09/18/what-is-credit-counselling-and-how-important-is-it-to-improve-your-cibil-score/
Thanks Deepali. I am unable to open the url, anyway i will try to fix this concern. Thanks.
I have a credit card against FD from SBI and I usually pay twice or trice the minimum due amt. Can you tell me will this have any negative impact on my credit score ? Do we need to clear our total outstanding balance to improve the credit score?
Paying minimum dues will not hurt your credit score but it will neither help you improve your score. Your debt will keep on piling up and the rate of interest adding.
You need to pay off the complete debt to see the improvement in your score as the amount owed will surely come down. Amount owed is one of the parameter which scores second highest and has a weightage of 30% on the score.
To know more on it visit on : http://www.freescoreindia.com/articles/will-making-the-minimum-payment-on-my-credit-card-hurt-my-cibil-score.html
Regards
Deepali
Hello All,
It’d be great if anyone answers my questions:
1. For a CIBIL Score : Is there anything like, we have to use monthly some amount compulsory and pay off the dues???
2. Lets say I got a credit card and used for 4 months formal normal groceries and paid off the dues….. After that I didnt use the card for say 5 or 6 years … Will my CIBIL score get reduced???
Hello All,
It’d great if someone responds to my questions :
1. For a CIBIL Score : Is there anything like, we have to use monthly some amount compulsory and pay off the dues???
2. Lets say I got a credit card and used for 4 months formal normal groceries and paid off the dues….. After that I didnt use the card for say 5 or 6 years … Will my CIBIL score get reduced?
Hi Paddy,
Below the answers to your questions :
1. You get a credit score on active accounts for which you need to use the credit card and make payment on a timely basis. Also, the score is given to you on the basis of the last 24 months active accounts.
2. So like you said, if you use credit card for 4 months and made the payments regularly then you will get a score for the same. But if you then do not use it and keep it inactive you will turn into NH customer which means No History.
As explained to you in point 1. you get a score for the accounts which are active for the last 2 years. IF you keep the credit cards inactive for 5 to 6 years you wont get any score. To know more on credit score visit http://www.freescoreindia.com/
I am an NRI living in US. Few years back i bought a ULIP pension plan from ICICI. Paid 3 premiums of Rs 3 lakh each and now the fund value stands at around 16 lakh. I am still not very much aware about how this product works and concerned only about how much i paid and what’s the return which i am earning.
Few days back, i was shocked to know that pension plans are taxable products, and thus whatever i get back when i surrender the plan would be added in my Income and will be taxed in India as per the tax slab systems.
I discussed this with the bankers and they suggested a unique way out…they advised to take a loan against securities against this policy. Bank will lend 80% of the fund value and i have to assign the policy to the bank which makes them the owner of the policy.
Now after few months i should request the bankers to sell out the Policy as i am in need of money. They can deduct whatever is due from my side, and pay me back the rest of money.
Since bank would be the owner at that time, so the policy proceeds would come to them and not to me, and thus whatever i get back will not be taxable.
It sounds quite favorable to me. But the major question that comes to my mind was…WOULD it EFFECT MY CREDIT SCORE in any way? As i will be taking loan and not repaying it but telling bank to sell off the securities.
My question to you is How would this transaction be reported to CIBIL?
I have seen the request for selling the securities format of bank, and it is nowhere saying that i am unable to pay back the loan…but i am in need of money.
Can you please guide?
As a first time home buyer applying for a home loan is a hectic task for me. This post helps me to know the common myths on a home loan and give the confidence to apply for a home loan. Thanks for sharing this post.
Thanks Appaswamy