With the festive season round the corner and banks lowering interest rates on various loans, many will look into buying a home, a car or those ever-tempting consumer durables. A credit report plays an important role when it comes to getting a loan. In an interview with Firstpost, Arun Thukral, Managing Director, Credit Information Bureau India Limited, or Cibil, answers questions about the credit report, credit score and how a good score equals to better loan deals.
Excerpts from the interview:
What is a credit score and what's a credit report? People get confused, could you please explain.
Credit report is factual month to month credit history of the individual. Credit score is a numerical summary of the same report. It's a three digit number ranging from three hundred to nine hundred. Higher the score, more credit worthy that individual would be. And the risk initiated with that transaction will be the least. The nearer to lowest number would be of higher risk individual.
What are the important parameters that go into making the score/report?
As I said, the credit report is a factual month to month credit history of the person. The data is as per the information received by the credit granter. The credit history of that individual, the number of (loan) inquiries, what products (he's looking for) etc, all that goes, as detailed information is given on the report. The score is a three digit number, which would be built on the history, and the (kind of) inquires, the number of inquires, is summarized there. And, we arrive at the score.
Can someone with a good score get better rates as far as loans goes?
If you have a good score, you can actually go and negotiate with the credit granter to give you better terms and conditions. I know a lot of people who have gone for a housing loan and did not have to pay a processing fee (due to a high score), and they have also been able to negotiate a lower interest rate, as compared to the standard (rate) with the bank.
Good score= Better deals?
Absolutely, you can always negotiate and ask them. They are also interested in getting good customers. And they wouldn't want to lose out that opportunity, they will always be able to negotiate and get better terms.
Assuming that there is an error in the report, what does a consumer have to do to get the error rectified? Approach Cibil or approach the bank?
You can go to both. Logically, you are the bank's customer, and in case of an error, it has to be validated and corrected by the concern credit granter. At Cibil, we have a service called dispute resolution. You go on our website www.cibil.com/disputeresolution (and do the needful). The moment the error is re-validated and the credit granter identifies the error, the banks is suppose to correct it and send it to us and we will inform you appropriately. But, if the bank says that their data is correct (it's not an error) the report does not change and remains the same. As per the CIC regulation Act, the window give for resolution is 30 days.
How can one intentionally improve their credit score?
One, the score is dynamic number, it could be low or high today and it could change over a period of time depending upon your (payment) behavior pattern and how your credit history moves.
The thumb rule is that you should pay all your obligations and clear all you payments as per the EMI dates. You should never delay. As far as credit card goes, you should to the pay full (total amount due) amount. If you cannot pay the full amount, at least pay the minimum amount due. As long as your history remains clean and you continue to pay and meet your obligations, there is no way that you will get a lower score.
What are the common misconceptions that consumers have about credit reports/scores?
There are no misconceptions as such, since we have a lot of education initiatives that we do. The only thing that the consumer should understand is that every credit granter has its internal policy (For loan approval). And, a credit report and credit score is a very critical element, but it's one of the variables that they (banks) use while taking a decision while entertaining the application, deciding on the credit limit and like. It is not only because of Cibil's report but it's an over all decision that they will take. If you go to one credit granter, he would entertain the loan application with an "X" score and you might go to another credit granter and he might not.
Could you throw some light on the Cibil's new score 2.0
We launched the first score in 2007. (With the new score) the whole objective was to address the changing behavior of the consumers and the landscape change of the credit industry, we actually re-calibrated the score and came out with the new score. The range (300-900) still remains the same. The only difference is, let's say you had a score of 800 earlier it might now be around 750. This depends on case to case basis. This does not mean that your credit worthiness has gone down. It just means that the cut-off level which the banks are using will be lower. Another part of the new score version 2.0 is that we have come out with a risk index 1-5 (for new to credit consumers). Earlier, such borrowers had a thin file, and we needed a credit history of at least of six months to come out with a score. So, as per risk index the highest risk is 1 and the lowest risk is 5. Due to this (risk index) more people will come into the credit bracket, and credit penetration will increase. Earlier banks were a little averse to give credit to new borrowers; risk index would help banks to judge their (new borrowers) creditworthiness better with the risk index.