A poor Cibil score will mar your chances of securing a loan

Be extremely careful with the credit history that you build. Some wrongs are difficult to correct

Have you recently approached a bank for loan?

And were you unceremoniously shown the door?

Don’t be surprised. The bank has figured out that you don’t have a clean bill of credit history. What do we mean by a clean bill of credit history?

It’s the kacha-chitha of all the loans you may have availed in the past that shows no delinquency.

If you have missed out your monthly EMI payments, have had ECS returns and a few cheque bounces, it will tarnish your history with an agency like the Credit Information Bureau (India) Ltd. (Cibil, https://www.cibil.com/) bring your credit score down and seriously impair your creditworthiness with all financial institutions. They might then summarily reject your loan application, reduce the spending limit on your credit card or ask for a higher interest from you.

We were once approached by a client who was not able to get a home loan sanctioned despite having complete documentation and income eligibility. His loan officer told him he had an unacceptably low credit score. Shocked, he wanted to see the report and immediately downloaded from the site for as little as Rs 470 per report.

When our client went through the report, he found to his chagrin that quite a few erroneous overdue payment entries/ loans that he had foreclosed were showing as open in the report. He was also surprised to note that certain credit card payment delays had also been dutifully reported to CIBIL, resulting in further driving down his overall score. On Creditfina’s advice, he immediately swung into action and used Cibil’s dispute resolution mechanism to get some of the major issues resolved, but by then, a precious three months had lapsed, and the house he and his wife had an eye on, was out of their reach. It got sold to another, despite all the string pulling.

What is the name of this beast?

In India, credit information report are prepared and furnished by credit bureaus licensed by the central bank, i.e. the Reserve Bank of India (RBI). At present, we have four credit bureaus:

CIBIL (Credit Information Bureau of India)

Experian

EquiFax and

High Mark

Cibil, for some reason, appears to be the favorite of all banks and financial institutions in India.

The report that Cibil generates has a critical component called the CIBIL Transunion score. This score gives an insight into the likelihood of a customer defaulting during the tenure of the loan. In fact, Cibil system generates three score values:

  • -1 (Minus 1)
  • 2) Zero and
  • 3) Score range from 300 to 900

Let us understand what these scores communicate. A credit score of -1 means that a customer has no credit history. Such a customer is not necessarily the darling of any bank, because they have no means of predicting how he may behavior as a borrower. So CIBIL assigns him a score of -1.

You will get a score of zero, when your credit history is less than six months old. In all other cases, you would get assigned a score of 300 to 900. Please note the higher the score, the less likelihood of a default. Five broad factors decide the credit score for a customer:

  • Amount overdue and days past due
  • Credit Utilization,
  • Credit Mix
  • Number of enquiries and
  • Age of the borrower

What can you do to repair a poor credit history?

If you are late on payments, due to some unavoidable reason, personally visit the branch and talk to the bank officer rather than relying on verbal or email communication. Make sure you note down the name and number of the officer you talk to for any further communication.

Seek for an official settlement letter from the bank to ensure that the correct amount of payment, terms and conditions are entered in your records. Make all payments vide cheques to leave a paper trail. Insist on proper receipts for all the payments made.

On pre-payment seek for “No Due certificate” from the bank along with a forwarding letter (with the bank officer’s name and contact number). Make sure that the letter is sent to the bank’s head office to ensure proper closure.

Three months from the settlement, request for a ‘credit report’ to ensure that the dues have actually been cleared from your record. In case of any irregularity in the credit report, immediately forward the relevant documents along with the report to the head office of the bank.

If for some reasons your case remains unsolved you have the option to go to RBI, Consumer Court or report your matter to the Banking Ombudsman.

In addition, Creditfina recommends that you explore the following options to improve your credit score:

Know your scoreFirst and foremost, know your CIBIL score. It’s very easy. Visit www.cibil.com. Review the report and get any errors/ inconsistencies resolved through the CIBIL’s dispute resolution mechanism.

Use credit sparingly: If you have cash flow issues, use your credit cards sparingly.

Reduce/ eliminate personal loans from your portfolio: Personal loan is a form on unsecured loan, which in addition to carrying a high rate of interest, also impacts the credit score if it forms a substantial part of overall loan portfolio. In case you have an existing personal loan, clear it out immediately from your history!

Stop applying for new credit cards: Every credit card on earth promises new offers, reward points, fuel surcharge waivers etc., and first-year fee waiver. Don’t fall for such baits. One is more than enough, if you can track your payments.

Putting utility payments on auto-pilot: A good way to remove the worry of keeping track of various payment due dates is to activate ECS/ direct debit instructions. 

Recently, I applied for a Housing Loan, which was declined by the Bank due to some incorrect information in my CIBIL report. The report said, I took two loans, BUT THE FACT IS I NEVER TOOK SUCH LOANS, ON contacting

Remember that a lot of banks make mistakes in reporting the information to CIBIL. It is in your interest to remain in control of your finances. CIBIL usually take 30 days to rectify a mistake. That turned out to be a costly mistake for another of our client who had a deadline from the builder to make an overdue payment (that our client was trying to finance through a top-up loan), failing which, the builder would have applied an interest @18% p.a., under the MoU. Our client had no option but to let that house go! He eventually got a refund from the builder on his earlier payments, but in the process he also lost a good investment opportunity!

A data entry error need not become a costly mistake if you can have it rectified, as soon as you notice it. In the end, your credit score may take a big hit and that is likely to pinch…ouch!!!

— From Creditfina’s Social Marketing Division

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Is the time ripe for part-paying your existing home loan?

If you have some spare cash, there is no time as NOW to make a pre-payment on your outstanding home loan, when the interest rates are high

 

There are myths and more myths. Also, pre-payment appears to be difficult proposition when inflation is high and there is a general squeeze on fixed salaries.

Yet, if you are paying 12% to 14% on your four to five year old housing loan, and have some spare cash tucked away, now is the time to cut your loan exposure. It’s a myth that you should repay only after a loan is five years or older. Sometimes, it’s wiser to even break fixed deposit investments to prepay loans ahead of schedule.

Just make sure that you have enough reserves set aside to see you through a rainy day or a sudden crisis. Else, you might get drawn into the repeat cycle of taking another loan, another interest rate structure, prepayment penalties etc.

We would advise against full-repayment, as banks and, especially non-banking financial institutes often impose a ‘pre-payment penalty’ or what are also called foreclosure charges of upto 2% of the outstanding loan amount, if you close your loan account completely.

Although, in a notification issued two years ago, The Reserve Bank of India (RBI) directed banks not to levy any pre-penalty on individual borrowers if they choose to pre-pay their floating interest home loans, some non-banking institutions continue doing so.

Be warned however that banks often waive off pre-payment charges if you negotiate hard and remember that whatever be the used up tenure of the loan, it is always cheaper to prepay and not just in the early stages of your loan tenure. Other tips to help you make this smart decision:

Tip# 1: Before you pre-pay, set aside some spare funds, invested in instruments that can be liquidated easily during a possible, future, medical or financial crisis.

Tip #2: If you have a credit card or personal loan, pay that off first because the interest rate on that will be the highest; at least higher than that on your home loan.

Tip # 3: Don’t forget that home loans also offer you certain tax benefits that drive down their post tax cost. Work out the economics of this tax benefit against pre-payment, with your financial consultant before you choose to go down this road.

Tip #4: Make sure that if there is a pre-payment penalty, it is not higher than 2%. Banks are obliged to send you a copy of the loan document.

Tip # 5: Remember that you can get the prepayment penalty waived off easily, if you maintain a good credit history. You can check your credit history and score from third-party credit rating agencies such as CIBIL (www. https://www.cibil.com/) for a very nominal fee of Rs 500.

Tip # 6: Quite a few banks do not charge pre-payment penalty if the loan is prepaid partially, which is what Creditfina consultants would advise you to do.

In sum, prepay only after you have set aside some money for meeting unforeseen emergencies and if you don’t have any unsecured loans to pay off first.

 

— From Creditfina’s Social Marketing Division

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